Transfer and Transmission of Shares

Shares are like any other goods. A purchaser gets no better title than the seller [1] .

The capital of a company is divided into a number of undividable units of a preset amount called 'shares [2] '. The Supreme Court of India in CIT v. Standard Vacuum Oil Co, [3] observed, that a share is an interest measured by a sum of money and made up of diverse rights conferred on it. [4] It implies the existence of some person entitled to the rights, which are rights in action as distinct from rights in possession, and until the share is issued the person does not exist. [5] 

Transferability is an important feature of a share in a company registered under the Companies Act, from which emanates another feature of a company- perpetual succession. It endows a company with perpetual and uninterrupted existence. Upon incorporation, a company acquires its own independent legal personality and legal entity in the company. Section 82 [6] states that the share shall be a movable property and transferable in a manner provided by the articles of the company. It has, however, been consistently held by the courts that subject to restrictions imposed by the articles, a shareholder is free to transfer shares to a person of his own choice and that the articles cannot put a complete ban or unreasonable restriction on the transfer. While shares in a private company are not freely transferable and are subject to the restrictions imposed by the articles of the company, shares in a public company are freely transferable [7] . There are different types of transfer such as transfer of share by gifts, in case of joint holdings and transfer in private companies. [8] 

Transfer of shares is a transaction resulting in a change of share ownership. A shareholder, whether in public or private company, has a property in his share which he has a right to dispose of, subject only to any express restriction which may be found in the articles of the company [9] .

Transmission is the automatic process; when a shareholder dies, his shares immediately pass to the personal representatives or, if a member is declared bankrupt, their shares will vest in the trustee in bankruptcy [10] .

The Depositories Act, 1996 provides for an alternate mode of effecting transfer of shares. Investors have the choice of continuing with the existing share certificates (i.e., in physical form) and adopt the existing mode of effecting their transfer. Every depository is registered with the SEBI and receives a certificate of commencement of business on fulfillment of such conditions. Upon entry into the system, share certificates belonging to the investor will be dematerialized and their names entered in the books of participants as beneficial owners. The investor’s names in register of companies concerned will be replaced by the name of the depository as the registered owner of the securities. The investors will, however, continue to enjoy the economic benefits from the shares as well as voting rights on the shares concerned [11] .

Chapter one

Transfer of shares – Procedure and Scope

"When joint stock companies are established, the great object was that the shares should be capable of being easily transferred [12] ."

One of the most important features of a Company is that its shares are transferable. Rights of a shareholder to transfer his share are always subject to provisions in Articles of Association. [13] Upon incorporation a company acquires its own independent legal personality and distinct entity, and its shareholders acquire the right to hold and transfer shares. A Company limited by guarantee and having no share capital, no transfer of share is involved as there are no shares to transfer. A member of such a company may transfer his 'interest' as per section 82 that allows for transfer of shares or 'other interest.' [14] 

1.1 Need for an instrument of transfer

Shares are moveable goods. The ownership of moveable goods may be transferred by delivery of possession, but as per section 36 there is a contractual relationship between the members and the company. When shares are transferred the contractual relationship is assigned to the transferee which requires an instrument of transfer. [15] Transferring a share involves a series of steps, first an agreement to sell, then execution of a deed of transfer and finally registration of the transfer. Section 108 lays down the procedure for transfer.

1.2Procedure for transfer of Shares

1) Instrument of transfer must be executed by both transferor and transferee.

2) It must be duly stamped

3) It must be delivered to the company along with certificate relating to shares transferred

4) Must be in the prescribed form and presented to prescribed authority. [16] 

Section 108 requires the transfer to be in a proper instrument of transfer known as ‘Share Transfer Form’ which is required to be presented to the Registrar of Companies before it is signed and filled up by the transferor [17] . Any instrument of transfer which is not in conformity with these provisions shall not be accepted by the company. In cases of hardship the Central Government may extend the period of time. The transferee becomes a member of a company only when the transfer is registered by the company [18] .

In Prafulla Kumar Rout v. Orient Engg. Works (P.) Ltd [19] it was observed that all that section 108 requires is that before delivery, the stamps should be affixed. However, in Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd [20] ., the Kerala High Court observed that instrument is unstamped if the it is not properly executed. Cancellation of the stamps by the staff of the company does not make the transfer instrument duly stamped [21] . Provisions of Section 108 are inapplicable to transfer where transferee or transferor are entitled as beneficial owners in the records of depository [22] .

1.3Demat Shares

In the case of fresh issue (IPO), the investor would indicate his choice in the application form, if he opts to hold the security in the depository mode, commonly known as 'demat' mode. An investor, who opts for a depository mode may at any time, opt to choose out of it and claim share certificate from the company by substituting his name as the registered owner in the place of the depository. Ownership changes in the depository system will be made automatically on the basis of delivery vs. payment. The provisions of section 108 are inapplicable to transfer where transferee and transferor are entered as beneficial owners in records of depository [23] .

Under the depository system securities may be dematerialized [24] that may be transferred by recording entries in a depository. SEBI (Disclosure and Investor Protection) Guidelines, 2000 [25] stipulates that no company shall make public or offer sale of securities unless it enters into an agreement with the depository or gives an option to its shareholders to hold securities in dematerialized form no stamp duty is charged. [26] 

Where there is an immediate and unconditional transfer of shares with stipulation for determination of consideration for transfer to be mutually agreed on in future, it cannot not be said that agreement for transfer of shares was conditional on determination of price of shares [27] . Forgery [28] does not confer any title because it is not merely an absence of free consent but there is no consent at all [29] .

1.4Time Limit

As per section 113, a company is required, within 2 months after the application for transfer, to deliver the share certificates duly transferred. In Re, Reliance Industries Ltd. [30] the company failed to deliver shares within the prescribed time of 2 months. CLB [31] fined the company and share transfer agents. The default under section 113 is a continuing offence and, therefore, shall not be subject to limitation. [32] 

1.5 Board of Directors- Power of refusal

Where the AoA [33] of a Company give power to the Board to refuse registration of a transfer of shares, such power must be exercised by a resolution of the Board. The Board may refuse to register the transfer as long as they are acting in the interests of the Company, but if they exercise their discretion to refuse malafide, i.e. they act oppressively or corruptly, the CLB [34] or the Court will now interfere and order registration.

AoA of a company may be specific and empower the BOD to refuse to register transfers on certain specific grounds. Thus, where AoA of a company contain a provision to the effect that no share shall be transferred to an outsider if any member of the Company was willing to purchase the same at fair price to be determined by the directors, and transfer to an outsider shall be allowed only when the Board of Directors was unable to find a willing member within a stipulated period; the directors having offered to purchase those shares, the question of registering shares in favour of an outsider not arise. [35] The refusal to register transfer of shares on the ground that the transferor had been indulging in acts which were against the interests of the company is not right. [36] As per section 111 if a Company refuses to register the transfer of shares, within 2 months from the date of lodging the instrument of transfer, send notice of refusal to the transferor or transferee giving reasons. CLB [37] on appeal may direct the registration of the transfer [38] .

In Hemanigiri Finance & Leasing (P.) Ltd v. Tamilnad Mercantile Bank Ltd. [39] , the CLB/ Tribunal held that there is no blanket authority available to a company to refuse registration of transfer, even if Articles provide absolute discretion. When the Articles do not provide for any powers for refusal, the company cannot refuse.

In case of refusal, on appeal to the CLB/Tribunal [40] , it is always for the party assailing the decision of the BOD to demonstrate that such decision suffers from unsustainable reasons. [41] The Tribunal while dealing with an appeal against refusal may, after hearing the parties, either dismiss the appeal or, by order, direct that the transfer shall be registered by the Company and the company shall comply with such order within 10 days of the receipt of the order. [42] 

Certification of an instrument of transfer lodged with the company is a process in which the company certifies on the instrument of transfer that the share certificate as stated in the certification stamp has been lodged with the company for registration of transfer. It is an endorsement made by the company on the instrument of transfer lodged, to the effect that stated above. It is a kind of receipt. This provision has been made to facilitate the sale of smaller number of shares in case the share certificate is for a larger number of shares [43] .

1.6rights of transferees

Till the company has registered the transfer, the name of the transferor continues to appear in the register of members and thus he continues to be the lawful owner but transferee is the beneficial owner (cestui que trust). In order to protect the interest of the transferees; section 206A was added by the Amendment Act, 1988 which provides that where any instrument of transfer of shares has been delivered to the company for registration and transfer has not been registered, the right to dividend, rights shares and bonus shares will be kept on hold. This dividend would be kept in an “Unpaid Dividend Account" [44] unless the company is authorized by the registered holder of such shares in writing to pay dividend to the transferee. [45] 

1.7Blank Transfer

Where a shareholder signs a share transfer form without filling in the name of the transferee and hands it over along with the share certificate to the transferee thereby enabling him to deal with the shares, he is said to have made a transfer ‘in blank’ or a ‘blank transfer’. It is not a negotiable instrument because it may be transferred by mere delivery. Accordingly, the title of the transferee acquiring shares through a blank transfer is subject to the title of the transferor.

A bona fide transferee from a person who has acquired a blank transfer form by fraud does not acquire good title to the shares included in the deed. A transfer in blank, when accompanied by a share certificate, carries to the transferee both the legal and equitable rights to the shares and also the right to call upon the company to register the transfer. [46] This right to get himself registered as a member is available to the transferee even after the death of the transferor. [47] Blank transfer, however, results in loss of stamp duty and income tax. To prevent abuse of blank transfer subsections (1A) and (1B) of section 108 were introduced in 1965 [48] .

1.8Right to Pre-emption

It is a common practice to provide in the articles that any member intending to transfer his shares must offer the shares first to other members of the company. Such restrictions are not invalid. The conditions imposed and the formalities prescribed by the articles are mandatory. [49] The pre-emption clause does not, however, completely bar transfers to outsiders [50] .

1.9 Restrictions on Transfer of Shares

I General grounds

Malafide instrument of transfer, inadequacy of reasons, irrelevant considerations and bad delivery of transfer documents, contravention of law, prejudicial to company or public interest and stay order [51] by Court are the reasons when transfer of shares can be restricted. [52] 

II Special circumstances

1) On transfer with regard to the company's borrowing

2) Under SEBI Guidelines shares allotted to certain categories of shareholders such as promoters, employees, etc are subject to condition of non-transferability for a period of 3-5 years accordingly.

3) CLBs power under Section 250 -- prohibit public transfers.

4) Under FEMA and joint venture agreements. [53] 

Chapter Two

Applicability of section 111 to Private and Public Companies

2.1Transfer of shares in a private company

In Dr. Jitendra Nath Saha v. Shyamal Mondal, [54] it was observed that after the amendment of Section 111 in 1988, all the provisions of S.111 are applicable to private companies and deemed public companies. In Canara Bank v. MTNL. [55] CLB has held that the Depositories Act, 1996 has introduced important changes in the CLB’s jurisdiction regarding transfer of shares and debentures, namely, the entire provisions as contained in Section 111 are now made applicable only to private companies which also include a private company which has become a public company by virtue of Section 43-A.

In Charanjit Shingh Ghumman v. Dr. Reddy’s Laboratories Ltd. [56] the CLB observed that though with the coming into force of sub-section 14 of S. 111, S. 111 is not applicable to public companies, the CLB may consider a petition on merits under S. 111-A of the Act to meet the ends of justice.

2.2Transfer of shares in a public company

Recently, the Bombay High Court has said in the case of Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd [57] that a pre-emptive right would impose a fetter on transferability of shares – a requirement envisaged only for private companies and in fact prohibited for public companies, in the scheme of the Act – and therefore “patently illegal [58] ".

According to sec. 111 A, the shares or debentures and any interest therein of a company, other than a private company and a deemed public company shall be freely transferable. [59] 

However, if a company, without sufficient cause, refuses to register transfer of shares within two months from the date on which, the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board (now Tribunal) and it shall direct such company to register the transfer of shares.

In Peerless General Finance and Cement Co. Ltd v. Poddar Projects Ltd. [60] , it was held that provisions of section 111A do not put any time restriction on approaching the CLB and, therefore, a public company cannot refuse rectification of the plea of limitation. Only when a company refuses to register transfer of shares on grounds that transfer is in violation of provisions of SEBI Act or regulations, provisions of SlCA will apply.

In Turner Morrison Ltd. v. Jenson & Nicholson (India) Ltd [61] , the Bench held that in terms of recently introduced section 111A, the CLB's scope of power for rectification of register of members is restricted only to cases of refusal by the company to make transfer of shares or securities. This section applies to public companies.

2.3 Further Rights Granted

The right of shares or Debenture holders, to transfer shall including voting rights unless they have been suspended by an order of the CLB [62] . Notwithstanding anything contained in this section, any further transfer, during the pendency of the application with the Company Law Board, of shares or debentures shall entitle the transferee to voting rights unless the voting rights in respect of such transferee have also been suspended [63] . CLB should decide all matters pertaining to rectification under section 111 and if it is found that matter in question does not fall under it, and then only it may direct a party to get its right adjudicated by Civil Court. [64] 

Chapter Three

Transmission of Shares

Transmission of shares takes place, when the registered shareholder dies; or when he is adjudicated an insolvent; or where the shareholder is a company it goes into liquidation. On the death of a shareholder, his shares vest in his legal representative. The legal representative may transfer the shares devolved upon him by transmission. According to s.109 [65] , a transfer share or other interest in a company of a deceased member made by his legal representative is not a member, is valid as if he had been a member at the time of the execution of the instrument of transfer. Likewise, according to Reg 26(1) in Table A [66] , any person entitled to a share due to the death or insolvency of a member, may either reelect to be registered himself as a member; or alternatively, transfer the shares to someone else [67] .

The legal representative can sell the shares without being registered subject to the provisions of the Articles. A company has no powers to refuse registration of transmission of shares once the legal heir produces a proper legal representation to the estate by way of will/probate/succession certificate, etc., if the same is required in terms of the Articles, unless there is an injunction against acting in terms of the legal representation [68] .

Transmission of shares in favour of a member of a private company who is engaged in a competing business cannot be refused. In S.M. Hagee Abdul Hye Sahib v. KNS Hajee Shaik Abdul Kadar Labbai Sahib Co. (P.) Ltd [69] ., the CLB held that a transfer of shares in a private company may be refused in case the transferee is engaged in a competing business but transmission cannot be refused on that ground. [70] Succession certificate covering shares held by a deceased member on the date of his death would cover subsequent issue of bonus shares and no fresh succession certificate would be required [71] .

It is for the court to be satisfied about the payment of proper court fees and if coin fees paid is insufficient, the recovery of deficit court fees along with penalty is to be decided by the authority of the court or revenue authority. Once the succession certificate has been produced from the competent court which has declared the appellant as legal heir for the shares in question and there is no other claimant for the said shares, the company ought to effect the transmission of shares on the basis of succession certificate produced where shares are held in joint names [72] .

3.1Transmission v Transfer

Transfer is by the act of the parties. Transmission is by devolution of law, i.e. death or bankruptcy. In transmission of shares no procedures are required to be followed unlike in transfer of shares. [73] 

Conclusion- Position in UK and Indian Companies Bill 2009

In the UK Companies Act 1985 the directors in their absolute discretion and without assigning any reason therefore, decline to register the transfer of any share. The exercise by the directors of such a power is difficult to challenge. It would be necessary for the transferee to show bad faith. [74] The second most common restriction which is often included in articles is a pre-emption provision, i.e. that shares must be offered to existing shareholders in proportion to their present holdings. There can be provisions that a person who ceases to be a director has to transfer their shares [75] .

The Indian Companies Bill, 2009 paved the way for modern legislation to ensure growth and regulation of corporate sector in India. In view of various reformatory and contemporary provisions proposed coupled with omission of existing obsolete compliance requirements, the companies in the country would be able to comply with the requirements of the proposed Companies Act in a better and more effective manner [76] . The Companies Bill, 2009 contains the words ‘as may be prescribed’ many times which consequently permit the Government to make discretionary rules. Quantity rather than substance floods the situation in a highly litigious country like India. If the Companies Bill, 2009 is passed as it is into Law, the intensity of Company Law and of corporate governance regulation would be noticeably diluted [77] .

Section 111(2) to the effect the shares and debentures in a public company are freely transferable and Section 111A (3) to the effect that in the case of public company rectification of register of members is only possible when there is a violation of statute law and that such an action is to be brought before the Tribunal within two months from the date of registration of transfer, have been omitted [78] . These are very significant lacunae, which can create a lot of corporate litigation.