When it comes to issuing and transfer of shares, the rights and powers of directors are outlined in the Companies Act 2006, the articles of association, and any service agreement between the company and director. However, members are entitled to change these rights at any time by passing a resolution.
A proposed share transfer must be processed or rejected within two months of receipt. Where a transfer is rejected, the reasons for refusal should also be provided within that timescale. While reasons should be provided, there is no need to provide minutes of directors’ meetings as evidence of the reasons stated.
Step 1: Obtain share transfer deed in the prescribed format. Step 2: Execute the share transfer deed duly signed by the Transferor and Transferee. Step 3: Stamp the share transfer deed as per the Indian Stamp Act and Stamp Duty Notification in force in the State.
The High Court said that the purpose of a power vested in the directors to refuse to register a transfer of shares was to protect the interests of a company’s shareholders as a whole. They should exercise that power honestly and in good faith, and not arbitrarily, capriciously, perversely, irrationally or unreasonably.
(1) If a company refuses to register a transfer of any share, debentures or other interests in the company it shall, within one month after the date on which the transfer was lodged with it, send to the transferor and to the transferee notice of the refusal.
SAMPLE BOARD RESOLUTION FOR APPROVAL FOR TRANSFER OF SHARE
The Chairperson informed the Board that Company has received 1 share transfer request, accompanied with share transfer deed duly filled in, signed and stamped along with other related documents, for approval of the transfer of shares of the Company.
What Documents are required for share transfer ?
- Income Tax PAN of both the transferee and the transferor.
- Passport size colour Photo of both the transferee and the transferor.
- Aadhaar Card or Electricity Bill or Passport or Driving License or Voter ID Card of both the transferee and the transferor.
To initiate a transfer you need to sign a demat instruction slip (similar to a cheque leaf), which the DP will give you, and submit it back to the DP with complete details such as the date of transfer, scrip name, quantity, international security identification number (ISIN), recipient’s DP name and ID.
Directors have a discretion to refuse any transfer
As a directors’ decision, each director will have one vote on the resolution, regardless of the number of shares held. To refuse a transfer under such a provision, the directors must be capable of passing a valid collective resolution.
Directors can approve transfers if they are granted this power in the articles of association. Otherwise, transfers must be approved by the existing members. Both the transferor and transferee should be given a copy of the stock transfer form. A share certificate should also be issued to the new shareholder.
In general, shareholders can only be forced to give up or sell shares if the articles of association or some contractual agreement include this requirement. In practice, private companies often have suitable articles or contracts so that the remaining owner-managers retain control if an individual leaves the company.