How to Transfer Shares in a Private Limited Company in India

Shares in a Private Limited Company represent ownership, and transferring them is one of the most fundamental transactions in corporate life. Whether a founder is exiting, an investor is entering, shares are being redistributed among family members, or an employee is selling their ESOP shares, the share transfer process in India follows a well-defined legal framework under the Companies Act 2013.

Unlike public companies where shares are traded freely on stock exchanges, Private Limited Companies have mandatory restrictions on share transfers built into their Articles of Association. This guide walks you through every step of the share transfer process, from reviewing AOA restrictions and executing the SH-4 deed to paying stamp duty, obtaining board approval, and completing post-transfer compliance.

Legal Framework Governing Share Transfers

Share transfers in Private Limited Companies are governed by multiple laws and regulations that work together to ensure transparency, protect shareholder rights, and prevent tax evasion.

• Companies Act 2013: Sections 44, 56, 58, and 2(68) define the transferability of shares, restrictions in private companies, and the process for registering transfers
• Companies (Share Capital and Debentures) Rules 2014: Rule 11 prescribes Form SH-4 as the standard share transfer instrument
• Indian Stamp Act 1899: Governs the stamp duty payable on share transfer deeds, with rates varying by state
• Income Tax Act 1961: Sections 45, 48, 50CA, and 56(2)(x) deal with capital gains taxation and gift tax provisions on share transfers
• FEMA 1999: Applies to cross-border share transfers involving non-residents and governs pricing, reporting, and approvals

Understanding Restrictions on Share Transfers in Private Companies

Section 2(68) of the Companies Act 2013 requires every Private Limited Company to restrict the right to transfer its shares through its Articles of Association. This is a fundamental characteristic that distinguishes private companies from public companies.

Common AOA Restrictions

• Right of first refusal (ROFR): The transferor must offer shares to existing shareholders at the same price before offering them to outside parties
• Board approval requirement: No transfer is valid until approved by the Board of Directors
• Lock-in period: Some AOAs restrict share transfers for a certain period after allotment, commonly 1 to 3 years
• Category restrictions: Some AOAs prohibit transfers to competitors, foreign nationals, or persons not approved by existing shareholders
• Maximum shareholder limit: The AOA must ensure the total number of shareholders does not exceed 200 (excluding current and former employees)

Step 1: Initiate the Transfer and Offer to Existing Shareholders

If the AOA contains a pre-emptive rights or right of first refusal clause, the transferor must first send a written offer to all existing shareholders. The offer letter should clearly state the number of shares being offered, the proposed price per share, and the deadline for acceptance (typically 15 to 30 days as specified in the AOA).

If any existing shareholder accepts the offer and agrees to purchase the shares, the transfer proceeds with that shareholder as the transferee. If no existing shareholder expresses interest within the specified period, the transferor is free to transfer the shares to the intended third-party buyer at a price not lower than the offered price.

Step 2: Determine Fair Market Value and Tax Liability

Getting the shares valued is an important step that affects both the legality and tax efficiency of the transfer.

Valuation Methods Commonly Used

Tax Implications at a Glance

Step 3: Execute the Share Transfer Deed (Form SH-4)

The Share Transfer Deed in Form SH-4 is the legally prescribed instrument for transferring shares. Both the transferor and transferee must sign the form, and it must be properly stamped before submission to the company.

Key Details to Include in SH-4

• Full name, address, and occupation of the transferor and transferee
• Name of the company (as registered with the ROC)
• Number of shares being transferred and their class (equity, preference)
• Distinctive numbers of the share certificates being transferred
• Folio number of the transferor in the Register of Members
• Consideration amount (or mention "nil" for gift transfers)
• Witness signatures with name and address

Step 4: Submit Transfer Deed and Certificates to the Company

After executing the SH-4, the transferor must deliver the following documents to the company:

• Executed SH-4 form with proper stamp duty
• Original share certificates of the shares being transferred
• PAN copies of both transferor and transferee
• ID proof of the transferee (Aadhaar, passport, or driving license)
• Evidence of compliance with AOA restrictions (offer letter records, shareholder non-acceptance proof)

The documents must be submitted within 60 days of execution of the SH-4. If not submitted within this period, the deed may need to be re-executed with fresh stamp duty.

Step 5: Board Meeting and Approval

The Company Secretary or authorised director places the share transfer request on the agenda of the next board meeting. The Board examines the following before approving the transfer.

• Whether the AOA restrictions on transfer have been complied with
• Whether the pre-emptive rights process was followed correctly
• Whether the SH-4 is properly executed and stamped
• Whether the transferee is eligible to hold shares as per the AOA
• Whether the transfer will breach the 200 shareholder limit for private companies

If the Board approves the transfer, a board resolution is passed recording the approval. If the Board decides to refuse the transfer, a notice of refusal must be sent to both parties within 30 days, clearly stating the grounds for refusal. The aggrieved party can appeal to the NCLT within 30 days of the refusal.

Step 6: Register the Transfer and Issue New Certificates

Upon board approval, the company updates its statutory records to reflect the change in ownership.

Actions After Board Approval

1. Update the Register of Members (MGT-1) with the transferee details including name, address, occupation, number of shares, and date of transfer
2. Cancel the old share certificates by marking them as "Cancelled" and filing them in the company records
3. Issue new share certificates to the transferee within one month of registration of the transfer
4. Update the Register of Share Transfers maintained by the company
5. Record the board resolution and transfer details in the company Minutes Book
6. Send a copy of the new share certificate to the transferee by registered post or hand delivery

Step 7: Post-Transfer Compliance and Reporting

After the share transfer is complete, several compliance actions must be taken to ensure the records are accurate and up to date.

Annual Return Filing

The updated shareholding pattern must be reflected in the Annual Return (Form MGT-7) filed with the ROC. The annual return contains a detailed summary of all changes in shareholding during the financial year. This is part of the overall private limited company compliance requirements.

Significant Beneficial Ownership

If the share transfer results in any person (individually or together with a person acting in concert) holding 10 percent or more of the shares or voting rights, the individual must file Form BEN-1 with the company, and the company must file Form BEN-2 with the ROC within 30 days.

Income Tax Reporting

Both the transferor and transferee must report the transaction in their income tax returns for the relevant assessment year. The transferor reports capital gains (or loss), and the transferee reports the acquisition. If TDS was applicable, the deductor files the TDS return with proper challan details.

Gift of Shares Between Family Members

Transferring shares as a gift between family members is a common practice in Indian companies, especially for succession planning and estate management.

Tax-Exempt Relatives Under the Income Tax Act

• Spouse of the individual
• Brother or sister of the individual
• Brother or sister of the spouse
• Lineal ascendant or descendant of the individual (parents, grandparents, children, grandchildren)
• Lineal ascendant or descendant of the spouse
• Spouse of any of the above persons

Gifts between these relatives are exempt from tax under Section 56(2)(x). The process is the same: execute SH-4, pay stamp duty, obtain board approval, and update registers. However, while the transferee does not pay gift tax, the transferor may still have capital gains tax liability if the shares have appreciated in value since acquisition.

Cross-Border Share Transfers (FEMA Compliance)

When shares are transferred between a resident Indian and a non-resident (foreign national, NRI, or foreign company), additional FEMA regulations apply.

Key FEMA Requirements

• Pricing guidelines: The transfer price must comply with RBI guidelines. For transfer from resident to non-resident, price must not be below fair value. For non-resident to resident, price must not exceed fair value
• Valuation: Fair value must be determined by a SEBI-registered merchant banker using internationally accepted pricing methodologies
• Sectoral restrictions: Check if the industry sector has FDI restrictions or requires government approval for foreign investment
• Reporting: File Form FC-TRS with the authorised dealer bank (AD Bank) within 60 days of receiving the consideration
• Tax withholding: TDS under Section 195 must be deducted and deposited on payments to non-residents

Common Mistakes to Avoid in Share Transfers

1. Skipping the ROFR process: Not offering shares to existing shareholders first when the AOA requires it can make the transfer voidable
2. Undervaluing shares deliberately: Transferring shares at a significantly lower price to reduce tax liability invites scrutiny from the Income Tax Department under Section 50CA and Section 56(2)(x)
3. Not paying stamp duty: An unstamped SH-4 is legally invalid and inadmissible as evidence. It also exposes both parties to penalties under the Stamp Act
4. Delayed certificate issuance: Not issuing new share certificates within one month of registration is a violation of Section 56(4) and attracts penalties
5. Ignoring SHA provisions: Proceeding with a transfer without checking the shareholders agreement can lead to contractual breach claims and injunction orders
6. Missing FEMA compliance: Cross-border transfers without proper pricing, valuation, and FC-TRS reporting can result in FEMA penalties from the RBI

Conclusion

Transferring shares in a Private Limited Company is a structured process that requires careful attention to the Articles of Association, proper documentation through Form SH-4, appropriate stamp duty payment, board approval, and post-transfer compliance. The entire process typically takes 7 to 15 days from the execution of the transfer deed to the issuance of new share certificates.

The most important steps are: check AOA restrictions and complete the ROFR process, get a proper valuation done, execute SH-4 with correct stamp duty, obtain board approval, update the Register of Members, issue new certificates, and report the transfer in tax filings and annual returns. For cross-border transfers, additional FEMA compliance is mandatory.

If you need professional support with share transfers, valuations, or related compliance, our team of experienced Company Secretaries and Chartered Accountants at IncorpX can handle the entire process from end to end.