Transfer of Unquoted Equity Shares: 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, whether due to exits, fundraising, or internal restructuring. However, such transfers are governed not just by mutual agreements but by the Companies Act, 2013, which lays down procedural, documentary, and compliance requirements.
For Directors, Company Secretaries, Chartered Accountants, and startup founders, understanding the legal and procedural framework is essential to ensure that share transfers are valid, enforceable, and complaint-free.
Relevant Provisions under Companies Act, 2013
Section 56 – Transfer and Transmission of Securities:
This section governs how shares are to be transferred and recorded by the company. It mandates the submission of a valid instrument of transfer, approval by the board, and timely updating of registers.
Articles of Association (AoA):
Private companies often impose restrictions on share transfers under their Articles of Association, such as:
- Right of First Refusal (ROFR)
- Lock-in periods
- Board discretion to refuse transfer
These contractual limitations override general freedom of transfer unless amended.
Step-by-Step Transfer Process – Private Company
Here’s how a typical unquoted share transfer under the Companies Act should be executed:
Step-by-Step Flow:
- Check AoA – Confirm restrictions, ROFR, or board approval requirements
- Identify Buyer – Buyer may be a resident or non-resident, subject to FEMA compliance
- Valuation (Optional) – While not mandatory under Companies Act, often required under FEMA/Tax laws
- Form SH-4 Execution – Instrument of transfer signed by both parties with proper stamp duty affixed
- Submit to Company – Submit SH-4 and original share certificate within 60 days of execution
- Board Meeting – Board considers and approves (or rejects) the transfer
- Register Update – Company updates register of members and issues new share certificate (within 1 month)
Stamp Duty: Typically 0.25% of the consideration (varies by state)
Timelines, Disclosures & Practical Hurdles
| Requirement | Timeline / Rule |
|---|---|
| SH-4 Submission to Company | Within 60 days from execution |
| Board Approval & Entry in Register | Within 30 days of submission |
| Share Certificate Issue | Within 1 month post registration |
| Stamp Duty Payment | At the time of or before signing SH-4 |
Practical Hurdles:
- Missing stamp duty / incorrect value
- Incomplete execution of SH-4
- Failure to comply with AoA restrictions
- Transferor-only submissions (needs transferee consent too)
- Board refuses transfer without proper resolution
Visual: Transfer of Shares – Companies Act Workflow
- Check AoA restrictions
- Identify buyer and get mutual consent
- Execute SH-4 with stamp duty
- Submit SH-4 + share certificate to company
- Hold board meeting for approval
- Update statutory register
- Issue new share certificate
Frequently Asked Questions
1. Is valuation required under Companies Act for transfer of shares?
No, but it’s recommended when FEMA or Income Tax rules apply. Especially relevant in cross-border transfers.
2. What is SH-4?
It is the prescribed instrument for transfer of shares under Section 56 of the Companies Act. It must be signed, stamped, and submitted to the company.
3. Can a company reject a share transfer?
Yes, especially if AoA restricts it. The board can reject transfers that violate AoA clauses.
4. What happens if SH-4 is not submitted within 60 days?
The company may refuse registration. This can result in legal complications and require rectification.
5. Are there any exemptions from SH-4?
Yes. Transfers by directors/nominees on behalf of bodies corporate or government bodies have alternate formats.
How Our Firm Can Help
At N Pahilwani & Associates, we guide startups and private companies through the full lifecycle of share transfers:
- AoA Review & Legal Advisory
- Drafting & Execution of SH-4
- Valuation Reports (if required)
- Board Meeting Resolutions & Compliance
- ROC Compliance & Register Updates
- Advisory on inter-group or FEMA-linked transfers
Whether you’re issuing ESOPs, onboarding investors, or restructuring, our team ensures smooth, compliant share transfers.
Conclusion
The transfer of unquoted shares under the Companies Act is not a mere formality. It requires documentary accuracy, adherence to timelines, and compliance with both statutory and internal (AoA) requirements.
Proper legal and professional support ensures that share transfers stand scrutiny during audits, due diligence, and future transactions.
