Transfer of Unquoted Equity Shares – Stamp Duty Implications
When it comes to the transfer of unquoted equity shares, most professionals focus on valuation and tax compliance. However, stamp duty is a critical component that is often overlooked. Inadequate attention to stamp duty can render a transfer invalid, invite penalties, and complicate ROC filings or due diligence during funding or M&A.
For finance professionals, founders, company secretaries, and legal heads, it is essential to understand when, how, and at what rate stamp duty applies to ensure compliant share transfers.
Applicability of Stamp Duty on Unquoted Shares
Stamp duty on the transfer of shares is governed by:
- Indian Stamp Act, 1899
- State-specific stamp duty notifications
- Companies Act, 2013 (Form SH-4)
Even though shares are movable property, their transfer – especially in physical form using SH-4 – requires stamp duty to be paid.
Key Points:
- Duty applies on the instrument of transfer (Form SH-4), not the share certificate.
- Transfer is not valid unless duty is paid and the instrument is duly stamped and executed.
- It applies to both resident and non-resident transactions, subject to additional FEMA compliance.
Basis of Valuation for Stamp Duty
The duty is calculated as a percentage of the ‘consideration amount’ or Fair Market Value (FMV) – whichever is higher.
Valuation Basis Includes:
- Transaction Value: If shares are transferred between unrelated parties.
- Fair Market Value (FMV): Required in case of related-party transactions or when consideration is below FMV.
- Rule 11UA (Income Tax Rules): Often used for FMV determination in tax and FEMA contexts.
In practice, stamp authorities may demand FMV-certified valuation reports in high-value or group transfers.
State-Wise Stamp Duty Variations
Stamp duty rates vary by state. Here’s a comparison of two key jurisdictions:
| State | Rate | Remarks |
|---|---|---|
| Maharashtra | ₹0.25 per ₹100 (0.25%) | Mandatorily affixed on SH-4 |
| Gujarat | ₹0.25 per ₹100 or part thereof | Must be stamped before or at the time of execution of SH-4 |
| Delhi | ₹0.25 per ₹100 or part thereof | Requires adhesive or e-stamp |
| Tamil Nadu | ₹0.25 per ₹100 | Physical stamps or franking required |
Improper stamping can result in non-registration of share transfer by the company.
Process and Payment Obligations
How to Comply:
- Obtain Form SH-4: Prescribed transfer deed as per Section 56.
- Affix Proper Stamp Duty:
– Purchase non-judicial stamp paper, franking, or e-stamp.
– Stamp must be cancelled before or at signing. - Execution of SH-4:
– Signed by both transferor and transferee.
– Witness signature with name and address. - Submit to Company:
– Within 60 days from date of execution.
– Along with original share certificate.
Documents Required:
- Executed SH-4 with stamp
- Share certificate or allotment letter
- PAN of transferor and transferee (for high-value transactions)
- Valuation report (where required)
Stamp Duty Table (Illustrative)
| Transaction Value | Stamp Duty @ 0.25% | State | Payment Method |
|---|---|---|---|
| ₹1,00,000 | ₹250 | Gujarat | E-stamp / Franking |
| ₹10,00,000 | ₹2,500 | Maharashtra | Non-judicial stamp paper |
| ₹25,00,000 | ₹6,250 | Delhi | Adhesive stamp |
Duty must be paid on full consideration, not per share.
Frequently Asked Questions
1. Is stamp duty required for digital share transfers?
No, for demat shares, stamp duty is auto-collected via depositories. It applies only to physical (SH-4) transfers.
2. Who pays stamp duty – buyer or seller?
Typically, it is borne by the transferee (buyer), unless mutually agreed otherwise.
3. Can SH-4 be executed without stamp duty?
No. An unstamped or insufficiently stamped SH-4 is not legally valid and will be rejected by the company.
4. Is stamp duty applicable for gift or zero consideration?
Yes, duty is applicable on the FMV of shares, even if transferred as a gift.
5. Is valuation compulsory for stamp duty purposes?
It is not mandatory for all transfers, but recommended if the transaction value is unclear or below FMV.
How Our Firm Can Help
At N Pahilwani & Associates, we help you navigate the complex interplay of stamp duty laws, share transfer procedures, and valuation compliance, including:
- Valuation Reports under Rule 11UA or FEMA
- Drafting and Executing SH-4 Transfer Deeds
- E-stamping / Franking Assistance State-wise
- Shareholder Agreements & Legal Documentation
- Cross-border Transaction Compliance (with FEMA/Income Tax)
Need to ensure your share transfer is legally bulletproof? Reach out to us for stamp duty and corporate law consulting.
Conclusion
While stamp duty may seem like a minor cost, non-compliance can have major implications. It can derail investor onboarding, lead to regulatory fines, and affect future exits. By ensuring timely payment, proper valuation, and legal execution, companies can safeguard the legality of their share transfers.
Professional advice ensures that your transactions are compliant, documented, and future-proof.
