Transfer of Unquoted Equity Shares(4 of 5) – Companies Act Perspective, Process & Requirements

The transfer of unquoted equity shares—those not listed on a recognized stock exchange—is a common occurrence in private companies, especially during fundraising, exits, or restructuring. While mutual agreements are involved, these transfers are governed by the Companies Act, 2013, which lays down strict procedural and documentation requirements.

To avoid invalid transfers or legal disputes, it’s essential for Directors, Company Secretaries, Chartered Accountants, and startup founders to understand and follow the legal framework.

Key Legal Provisions under the Companies Act, 2013

Section 56 – Transfer and Transmission of Securities

This section outlines how shares are transferred, mandating:

• A valid instrument of transfer (Form SH-4)

• Approval by the Board of Directors

• Timely entry in the company’s statutory register

Articles of Association (AoA)

Private companies typically impose transfer restrictions through their Articles of Association, such as:

• Right of First Refusal (ROFR)

• Lock-in periods

• Board discretion to reject transfers

These restrictions are binding and override general legal provisions unless specifically amended.

Step-by-Step Share Transfer Process (Private Company)

The share transfer process under the Companies Act involves the following steps:

1. Review the Articles of Association (AoA)

   • Identify any ROFR, lock-in, or board approval clauses.

2. Identify the Buyer

   • Buyer may be a resident or non-resident (if non-resident, FEMA compliance applies).

3. Valuation (Optional)

   • Not mandatory under the Companies Act, but often required for FEMA or Income Tax compliance.

4. Execute Form SH-4

   • Signed by both transferor and transferee

   • Stamp duty (typically 0.25%) must be affixed

5. Submit to Company

   • SH-4 and original share certificate must be submitted within 60 days of execution

6. Hold Board Meeting

   • The Board of Directors must review and approve the transfer through a resolution

7. Update Registers and Issue New Certificate

   • Company updates the Register of Members

   • Issues new share certificate within 30 days of registration

Stamp Duty & Compliance Timelines

Note: Stamp duty rates may vary by state, but 0.25% of consideration is a common rate.

Common Pitfalls in Share Transfers

• Omission of stamp duty or incorrect amount

• Incomplete SH-4 or missing transferee signature

• Non-compliance with AoA restrictions

• SH-4 submitted only by transferor, without transferee consent

• Board refusal without passing a formal resolution

Workflow Diagram: Companies Act Share Transfer Process

1. Review AoA for restrictions

2. Identify and agree with buyer

3. Execute Form SH-4 with appropriate stamp duty

4. Submit SH-4 and original share certificate to company

5. Hold board meeting to approve transfer

6. Update member register and statutory records

7. Issue new share certificate to transferee

Frequently Asked Questions (FAQs)

1. Is valuation mandatory under the Companies Act?

No. However, it is advisable when FEMA or Income Tax rules apply—especially for cross-border transactions.

2. What is Form SH-4?

Form SH-4 is the prescribed share transfer instrument under Section 56. It must be:

• Signed by both parties

• Duly stamped

• Submitted to the company within 60 days

3. Can a company reject a share transfer?

Yes. The Board of Directors can reject a transfer if it violates the AoA, provided the decision is documented in a formal resolution.

4. What if SH-4 is submitted late?

The company may refuse registration, leading to potential legal and regulatory complications.

5. Are there exemptions to using SH-4?

Yes. In certain cases like transfers by nominees of companies or government bodies, alternate formats may be prescribed.

How Nexpective Advisors Can Help

Our team provides end-to-end advisory and compliance support for share transfers under the Companies Act:

• Legal Review of Articles of Association

• Drafting & Execution of Form SH-4

• Valuation Reports (if required)

• Drafting of Board Resolutions and Meeting Support

• Register Maintenance & ROC Filings

• Guidance on inter-group, ESOP, and FEMA-compliant share transfers

Whether you’re managing founder exits, investor onboarding, or corporate restructuring, we ensure your share transfer process is smooth, valid, and compliant.

Conclusion

Share transfers in private companies, especially involving unquoted shares, require strict compliance with the Companies Act, 2013. From reviewing the Articles of Association to executing Form SH-4 and conducting board approvals, every step must be meticulously followed.

A legally compliant process ensures smooth audits, due diligence, and investor confidence during funding rounds or exits. Professional guidance helps mitigate risks and ensure transaction enforceability.