There are different business characteristics and one of the significant ones is the transferability of shares. Section 44 of the Companies Act, 2013 states that the shares or any other interest of any member of a corporation are transferable and that the company’s articles provide for the manner of the transfer.
As per sub-section 2 of Section 58, the shares of members of a public company can be freely transferred. It also specifies that any arrangement between members for the transfer of shares is enforceable by law. The rules for the transfer and transmission of securities are set out in section 56 of the Companies Act, 2013.
Transfer of Shares
Securities are transferable assets pursuant to Section 56 of the Companies Act, 2013, and are transferred in the manner provided for in the articles referred to in the company’s AOA. A shareholder is free to transfer shares to a person of his own choosing, while a private limited company’s shares are not freely transferable.
It is handling over the rights to any other person who wants to become a member of the company. It is a voluntary act by a member that is preceded by the articles referred to in the company’s AOA.
Transmission of Shares
In cases of devolution by death, succession, inheritance, bankruptcy, marriage etc. devolution of the title of shares other than sale is transmission of shares. When a shareholder dies, heritage, bankruptcy, marriage and succession, this sort of circumstance occurs. Transfer of shares relates to a voluntary act of the shareholder whereas transmission of shares is by operation of law.
As provided in section 56(2) of the Companies Act 2013, Nothing in sub section (1) shall prejudice the power of the Company to register upon receipt by any person to whom such right has been transferred of an intimation of the transfer of any right to securities by operation of law.
A transfer of interest by a legal representative of a deceased member in the shares of a corporation of a deceased member of the company shall be treated as a transfer of shares by law. This transmission will be reported in the Registry of Members by a corporation. The transfer made by its legal representative of any security or other interest of the deceased person, even though the legal representative is not its holder, is legitimate as if he had been the holder of the transfer instrument at the time of execution. The legal heirs shall submit request letter with an attested copy of death certificate and other relevant documents for the transmission of shares.
DIFFERENCE BETWEEN TRANSFER AND TRANSMISSION OF SECURITIES
|Transfer of Securities||Transmission of Securities|
|Transfer takes place by a voluntary or deliberate act of the parties by way of a contract.||Transmission is the result of the operation of law. For example, due to death, insolvency or lunacy of a member.|
|An instrument of transfer is required in case of transfer.||No instrument of transfer is required in case of transmission.|
|Transfer is a normal course of transferring property.||Transmission takes place on death or insolvency of a holder of securities.|
|Transfer of securities is generally made for some consideration.||Transmission of securities is generally made without any consideration.|
|Stamp duty is payable on transfer of securities by a holder of securities.||No stamp duty is payable on transmission of securities.|
|As soon as transfer is complete, the liability of the transferor ceases.||Shares continue to be subject to the original liabilities.|
TRANSFER TO MINOR
Any member who is a minor is not competent to enter into any contract and the same will be void ab initio and hence, a minor cannot become a member of a company.
In the case of Ms. Nandita Jain vs. Benett Coleman and Co. Ltd, it was held that any agreement in writing for minor to become a member may be signed by his guardian and the same registration of shares in the name of minor cannot be refused, especially when shares are fully paid-up, on the grounds of transferee being a minor.
After a minor attains the age of majority then he may repudiate his liability on shares on the grounds of being a minor and company cannot plead on the grounds of having received dividends during his minority.
If company is ignorant of the minority of a transferee then also it will remain liable for all the calls on such shares held by the minor, unless the transfer was made through the lawful guardian.
It can happen that a forged instrument of transfer is submitted to the company for registration. In order to prevent the repercussions which would follow a forged transfer, businesses usually write to the transferor about the lodgement of the transfer instrument so that he can object if he wishes. The information is given to him that if no objection is raised before the specified date in notice then the transfer will be registered. The implications of a forged transfer are detailed hereunder:
- In the case of People’s Institution Co. vs. Wood and Co., 1961 (31) Com Cases 61, it was observed that a forged transfer is a nullity and original owner shall continue to be the owner of the security and company shall restore his name in the register of members.
A forged document does not attract any legal actions. This only results in non-transfer of shares from the original shareholder. Thus, a forged instrument leaves the ownership in the hands of previous owner only. The true owner can apply for the securities held by him if in case company registers the forged instrument. Company also does not incur any liability for registering the name on the basis of forged instruments.
- However, if the company gives a share certificate to the transferor and sells the securities to an innocent purchaser, the company is liable to pay the purchaser if it declines to register him as a member of the company or if, at the request of the true owner, his name has to be deleted.
- If a company incurs loss due to forged transfers, it may recover the loss from the individual who lodged the forged transfer.
In the case of Kaushalya Devi v. National Insulated Cable Company of India, 1977 Tax LR 1928 Del, the transferee was a bona fide purchaser for value which did not make any difference and the transferee was bound to return the securities to the person to whom those were legally belong.
A transfer must be executed by all the joint-shareholders to take it to the effect and if signature of any one is forged then the transfer shall be deemed void.
In Yeung vs. Hongkong and Shanghai Banking Corporation,1980 2 All ER 599, it was observed that an individual acting in good faith shall send in and procure the registration of the transfer and the issuance on the basis of a forged act, of a new certificate shall be obliged to indemnify the company from unpredictable consequences. This happens when a stock broker forwards the forged deed to a company innocently, trusting his clients.
In addition, Section 57 states that if any person falsely personates as the owner of any security or interest in a company or any share warrant or coupon issued pursuant to the Companies Act and thus obtains or attempts to obtain any such security or interest or any such share warrant or coupon or receives or attempts to receive any money owing to any such owner shall be punishable with imprisonment for one year extendable up to three years and with fine of Rs. 1 lakh which may be extended up to Rs 5 lakhs.
TRANSPOSITION OF NAME
In the case of joint-shareholders, one or more of the shareholders may require the company to modify the serial order of their names in the register of members of the company. During the process of rearranging the names there will be need for effecting consequential changes in the share certificates given to them. In the articles of company, if it is provided that senior-most join shareholder will be recognised for service of notice, copy of balance sheet, voting at a meeting, profit and loss account, etc. then the request shall be duly considered by the board or other authorised officers of the company.
Since no transfer of any interest in the shares take place on such transposition, the question of insisting on filling transfer deed with the company may not arise. Transposition does not also require stamp duty.
There is no need of execution of deed transfer for transposition as clarified by the Stock Exchange Division of the Department of Economic Affairs if the request by the joint-holders for the same was made in writing. But the execution of the deed is required if transposition is in respect of a part of the holding.