Share Transfer in Private Company — Why It Is Different from Public Company
In a public company, shares are freely transferable — you can sell them on the stock exchange without any restriction. But in a private limited company, Section 2(68) of the Companies Act specifically requires that shares CANNOT be freely transferred — the AOA must contain restrictions on transfer. This restriction is what makes a company 'private' — without it, the company would be classified as 'public.'
In practice, this means every share transfer in a private company requires: (a) compliance with the transfer restriction clause in the AOA, (b) Board approval (in most cases), and (c) proper documentation including stamp duty, share transfer deed (SH-4), and intimation to ROC. Getting the process wrong can render the transfer void — the buyer's name will not be reflected in the Register of Members, and they will have no shareholder rights.
The Standard AOA Restriction Clause
Table F of Schedule I (model AOA) provides the standard restriction: "The Board may, at its sole discretion, decline to register any transfer of shares..." This gives the Board complete authority to approve or refuse share transfers. Most private company AOAs adopt this clause or a variation of it.
Common variations in custom AOAs:
(a) Right of first refusal: existing shareholders must be offered shares first before transferring to outsiders. If existing shareholders decline (within specified time), then outsider transfer is permitted.
(b) Pre-emption rights: shares must be offered to existing shareholders in proportion to their existing holding.
(c) Lock-in period: shares cannot be transferred for a specified period (common in PE/VC investments — typically 1-3 years).
(d) Board consent required: no transfer without prior written approval of the Board.
(e) Tag-along/drag-along: if a majority shareholder sells, minority shareholders can sell at the same price (tag-along) or must sell at the same price (drag-along).
Step-by-Step Transfer Procedure
Step 1: Check AOA Restrictions
Read the AOA carefully — identify the transfer restriction clause. Ensure the proposed transfer complies with all conditions (right of first refusal, Board consent, lock-in, etc.). If the AOA requires offering to existing shareholders first: issue a notice to existing shareholders with the terms of the proposed transfer. Wait for their response within the period specified in the AOA (typically 15-30 days).
Step 2: Execute Share Transfer Deed (SH-4)
The transferor (seller) and transferee (buyer) execute a share transfer deed in Form SH-4. The deed contains: names of transferor and transferee, share certificate number, distinctive numbers of shares, number of shares, face value, consideration (transfer price), and signatures of both parties and a witness.
The transfer deed must be properly STAMPED. Stamp duty on share transfer varies by state — typically 0.015% to 0.25% of the consideration or market value, whichever is higher. Some states charge a flat rate. For demat shares: stamp duty is 0.015% (collected electronically through the depository).
Step 3: Determine Share Valuation
For income tax purposes, the transfer price must be justified:
Transfer to unrelated party: price determined by market forces (negotiation between buyer and seller). However, if the price is below fair market value: the difference may be taxed as income in the buyer's hands under Section 56(2)(x).
Transfer to related party: price must be at fair market value (FMV). FMV determined by registered valuer using prescribed methods (Rule 11UA — DCF or NAV method). If transferred below FMV: taxable as deemed income. If transferred above FMV: excess may be questioned.
Valuation methods (Rule 11UA):
(a) DCF (Discounted Cash Flow) — for operational companies with future earnings potential
(b) NAV (Net Asset Value) — for companies with significant tangible assets
(c) Book value — for small companies with minimal goodwill
(d) Comparable transaction — if similar shares have been recently transacted
Step 4: Board Meeting — Approve Transfer
Convene Board Meeting with the transfer deed and share certificate(s) placed before the Board. The Board passes a resolution approving the transfer. If the Board has concerns (AOA violation, inadequate consideration, parties not acceptable): it can refuse registration of transfer — but must communicate reasons within 30 days (Section 58).
Board Resolution format: "RESOLVED THAT the transfer of [Number] equity shares of Rs. [FV] each bearing certificate number [Certificate No.], distinctive numbers [From-To], from [Transferor Name] to [Transferee Name] for a consideration of Rs. [Amount] be and is hereby approved, and the Company Secretary / Director be authorized to register the transfer in the Register of Members and issue new share certificate to the transferee."
Step 5: Update Register of Members
After Board approval: update the Register of Members (Section 88) — cancel the old entry for the transferor and create a new entry for the transferee. Record: date of transfer, transferor/transferee details, shares transferred, consideration.
Step 6: Cancel Old Certificate, Issue New Certificate
Cancel the old share certificate and issue a new share certificate in the name of the transferee within 30 days of registration of transfer (within 2 months for demat shares). The certificate must bear the company seal (if common seal is adopted) or be signed by 2 directors.
Step 7: File with ROC (if applicable)
File Form MGT-14 (if the transfer is pursuant to a Board resolution for matters under Section 179(3)). File Form PAS-3 if new shares are allotted (not applicable for transfer — only for fresh allotment). Update the annual return (MGT-7) to reflect the changed shareholding.
Capital Gains Tax on Share Transfer
Holding period for LTCG: 24 months for unlisted shares (reduced from 36 months by Budget 2024).
STCG (held < 24 months): taxed at normal slab rates (up to 42.74%).
LTCG (held ≥ 24 months): 12.5% flat (no indexation benefit post-Budget 2024).
Section 50CA: if shares are transferred below fair market value as determined by a registered valuer, the FMV is deemed to be the full value of consideration for capital gains computation. This anti-avoidance provision prevents undervaluation of share transfers.
TDS: No TDS on transfer between residents. For transfer by NRI: TDS under Section 195 at applicable capital gains rate (LTCG 12.5% or STCG slab rate).