How Shares Are Transferred in a Private Limited Company

A share transfer in a private limited company involves more than a simple exchange of ownership. While the company remains the same, the change in shareholding carries legal consequences, making accuracy at every stage essential.

Shares are often transferred to raise capital, facilitate an exit, realign ownership, or plan succession. Where fresh investment or restructuring is involved, the company may first need to increase its authorised share capital to support the transaction. Identifying this requirement early prevents avoidable delays.

This guide explains the share transfer process, covering eligibility, restrictions, documentation, approvals, and common compliance issues.

What Is Share Transfer in a Pvt Ltd Company

A share transfer in a private limited company is the process by which a shareholder transfers ownership of shares to another person. The buyer may be an existing shareholder or an external investor, but the transfer must comply with the company’s Articles of Association and the Companies Act, 2013.

• The company’s legal structure remains unchanged.
• Only the register of members is updated to reflect the new owner.
• For investors, this is the standard way to enter a private company without altering its corporate identity.

Share transfers are governed by the Companies Act, 2013 and the Articles of Association.

• Under Section 56, the transfer must be supported by a duly executed and stamped transfer instrument.
• The instrument must be delivered to the company within the prescribed time.
• The Act also sets timelines for registration of the transfer and issue of updated share certificates.

Share transfers typically take place when:

• A shareholder exits and sells their stake
• The company restructures its ownership
• Succession planning requires a change in shareholding

Although routine in practice, every share transfer must strictly comply with the Articles of Association and statutory requirements.

Eligibility and Restrictions on Share Transfers

Before anyone initiates the procedure for transfer of shares in a private company, a quick check of eligibility and restrictions is essential.

Aspect	Key Points
Who can transfer shares	Only existing shareholders can transfer their shares
Who can receive shares	Shares may be transferred to an existing member or an external person, subject to the Articles of Association
Non-resident transferees	Transfers must comply with FEMA rules, sectoral caps, pricing guidelines, and applicable RBI conditions
Basis of eligibility	Eligibility is determined by the Articles of Association, foreign investment rules, and sector-specific restrictions
Articles of Association (AOA)	The AOA typically restricts free transfer and sets conditions and approval procedures
Right of First Refusal (ROFR)	If the AOA or a shareholders’ agreement provides a right of first refusal, shares must be offered to existing shareholders before any third party
Board approval	Most transfers require board approval. Refusal is permitted only if the Articles expressly allow it
Shareholding limits	Companies may prescribe minimum or maximum shareholding thresholds
Transmission of shares	Transfers due to death or insolvency follow a separate legal process and are not treated as voluntary transfers

Transmission by operation of law, such as on death or insolvency, follows a separate legal process. The legal heir must submit valid proof of title, after which the company records the transmission. This is distinct from a voluntary share transfer and requires different documentation. For a clearer explanation, see the difference between share transfer and share transmission.

Documents Needed for Share Transfer

The documents needed for share transfer help establish clarity and compliance. In most cases, the company will ask for:

• Share Transfer Form SH-4
• Board Resolution approving the transfer
• Original share certificates
• Proof of stamp duty payment
• Identity proof (Aadhaar and PAN)
• Bank details linked to the transaction

Missing paperwork is one of the most common causes of delay.

Since board approval is central to the transfer process, it helps to understand the types of resolutions and their briefs, especially when determining whether an ordinary or specific board resolution is required under the company’s Articles.

Note: Dematerialised shares are transferred through the transferee’s Depository Participant and not via Form SH-4. Both parties must complete DP procedures and ensure KYC and PAN details are updated. For physical shares, the stamped SH-4 and share certificate must be submitted to the company within 60 days of execution.

Step-by-Step Process to Transfer Shares in a Pvt Ltd Company

The procedure for transfer of shares in a private company follows a set order. Any skipped step can slow the process or invalidate the transfer.

Step 1. Review the Articles of Association

Check the AOA for restrictions and instructions. It may list approval requirements, timelines, or special conditions.

Since the AOA operates alongside the Memorandum of Association in defining a company’s internal framework, it helps to understand their respective roles. You can read more about this in MOA and AOA: meaning, differences, and importance.

Step 2. Prepare a Share Transfer Agreement

This agreement captures the terms agreed between the transferor and the transferee. Key details include:

• Names and addresses of both parties
• Number of shares transferred
• Transfer price
• Effective date of transfer

This agreement helps prevent disputes and sets clear expectations.

Step 3. Fill Share Transfer Form SH-4

Form SH-4 is mandatory. It records the transfer and must be signed by both parties. It records the details of the transfer and must be duly executed and stamped before or at the time of execution. The form includes:

• Company name
• Share certificate number
• Details of the transferor and transferee

Step 4. Pay Stamp Duty

Stamp duty is based on the share value or consideration amount. The rate varies from state to state. An unstamped form can render the entire transfer invalid.

Statutory timelines to remember:

• The instrument of transfer must be delivered to the company within 60 days of execution.
• The company should register the transfer and issue the new share certificate within one month of receiving the instrument. If shares were allotted (not transferred), certificates must be issued within two months of allotment or incorporation.

Ensuring proper stamp duty payment at the correct stage avoids delays and legal challenges during registration.

Since stamp duty rules often cause confusion, especially for physical certificates, refer to understanding stamp duty on share certificates for detailed guidance.

Step 5. Submit Documents to the Company

Send the signed SH-4 form and original share certificates to the company for verification. The company checks the documents before presenting them to the board.

Step 6. Board Approval

The board reviews the request during a meeting. If satisfied, directors pass a resolution approving the transfer. This step formalises the decision.

If the company refuses to register the transfer, it must provide written reasons within the statutory period; the aggrieved transferee may appeal to the Tribunal (NCLT) for rectification of the register and an order to register the transfer. Make sure the company preserves the refusal letter, it is necessary when seeking a remedy.

Step 7. Issue of New Share Certificates

Once approved, the company cancels the old certificates and issues new ones in the transferee’s name. The register of members is updated to reflect the new ownership.

Approval Process and Compliance Requirements

A share transfer must satisfy both internal rules and statutory requirements.

Approval Process

• The Board of Directors must approve the transfer through a board resolution
• Shareholder approval is required only if the Articles of Association mandate it
• Once approved, the company must update its register of members to reflect the change

Compliance Requirements

• Follow the Right of First Refusal and other transfer restrictions in the Articles or any shareholders’ agreement
• Ensure stamp duty is paid correctly at the time of executing the transfer instrument
• Comply with the Companies Act, 2013, particularly Sections 56 and 58
• Evaluate capital gains tax implications for the transferor
• TDS under Section 195 applies mainly to transfers involving non-residents, not routine resident-to-resident share transfers.

For a deeper understanding of how tax rules apply to equity transactions, you may also refer to this guide explaining tax rules for equity shares trading: Understanding the Income Tax Rules for Equity Shares Trading

Tax and Stamp Duty Checks

• Stamp duty varies by state and depends on whether shares are physical or dematerialised
• An unstamped or inadequately stamped transfer instrument may be treated as invalid
• Capital gains and reporting obligations should be reviewed, with professional advice where needed

Failure to follow the approval process or statutory requirements may lead to delays, penalties, or refusal to register the transfer.

Common Pitfalls During Share Transfer in a Company

Many companies run into trouble due to small oversights. A few issues appear repeatedly.

• No board approval before issuing new certificates
• Delays in lodging the transfer deed (beyond 60 days)
• Incorrect or unsigned documents
• Missing stamp duty and unstamped instruments
• Ignoring AOA rules or transfer restrictions
• Failure to update the register of members

Each of these errors may cause delays or create legal disputes.

How to Ensure a Legally Valid Share Transfer

A legally sound transfer respects company rules and statutory requirements. Keep a checklist handy.

1. Follow the AOA and ensure no restrictions are overlooked
2. Prepare and submit the correct documents
3. Obtain the board’s approval and record it through a proper resolution
4. Pay stamp duty as per the applicable state rate

Keep a copy of the stamped transfer deed, board resolution, and the company’s letter of registration or refusal; these documents are essential for proving title or for Tribunal appeals. A clean and compliant process protects both parties and keeps ownership records reliable.

Conclusion

Transferring shares in a private limited company calls for care, clarity, and consistent documentation. Each step has its place, from checking the AOA to issuing the new share certificate. A little attention during the process prevents costly mistakes later. If you need support with the procedure for transfer of shares in a private company, help with drafting or reviewing a shareholders’ agreement, or expert guidance on related documentation, our team at LegalWiz.in can assist in keeping the process smooth, compliant, and aligned with your long-term business plans.