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Sometimes during the investment and financing the transaction, it is not feasible to issue new shares to the investor and they purchase the shares from the existing shareholders. This is usually done through share transfer in the company.

Most of the transactions in the real corporate scenario are done through a combination of both i.e. new issuance and transfer of shares.

Transferability of shares in the private limited company

Normally share transfer under the companies act is regulated as per Articles of Association, Share Purchase Agreement and Companies Act, 2013.

There are certain formalities which have to be done such as submission of necessary forms, passing of board resolution (to show the company approve the transfer) and entering into the register of members.

You have to be cautious when the promoters transfer their shares. Generally, being an acquirer you must check following points:

  • Identify any financial burden such as creation of pledge;
  • Identify how the business is being conducted;
  • Detect the risk that may flow to the shareholders

Transfer of any property or assets must be evidenced by some document which must be properly executed. Under the companies act, there is a separate instrument prescribed which is form number SH-4 to transfer the shares. SH-4 is applicable if the shares are held in physical form only if the share held in Demat form then there is altogether different process has to be followed.† Shares are transferred under demat form in accordance with the instruction given to the depository participant (DP). DPs are brokers who are registered with SEBI to deal in demat shares.

Stamp Duty on share Transfer

Stamp duty is kind of tax payable on the execution of certain instruments. Stamp duty is calculated on the value of consideration paid. Value of consideration paid means the amount which transferee paid to transferor. Stamp duty on share transfer varies from state to state. The rates of stamp duty on share transfer in major cities are as follows:

Area

Rate (in %)

Delhi

.01

Mumbai

.25

Kolkata

.01

Bangalore

.01

Letís understand stamp duty implication through an example:

Mr Rohit Kumar holds 200 shares of company A, the face value of the share is Rs. 1000 per share. Imagine Mr Rohit Kumar Transfer these shares Mr Aditya for Rs. 1500. Now, Mr Rohit Kumar receives total consideration of Rs 3,00,000/-. So,

  1. Stamp duty payable on the share transfer is Rs. 30. [.01% on 3,00,000]

Being a party to this transfer of share, you must remember that share transfer form shall be sent to the company within 60 days from the date of execution along with shares. After submitting these documents, the company issue share certificate to the transferee or purchaser within one month from the receipt of the documents.

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