ContractsOverview of Share Transfer Agreements – I

INTRODUCTION

A unique feature conferred upon companies under the Companies Act, 2013 (the Act) is that the shares through which companies raise capital are transferable in nature. This option is available to both Private as well as Public Companies under the Act.

Such transfer of shares can either take place through a contract or by way of an arrangement made between the party intending to transfer their shares and the prospective buyer of such shares. Herein, the transfer of shares can take place by way of gift or sale either to a new shareholder or to any existing shareholder.

SHARE TRANSFER AGREEMENT

A Share Transfer Agreement (STA) – also referred to sometimes as the Stock Transfer Agreement – is an Agreement that allows a member of a company to transfer his/her ownership in shares to another new or existing shareholder or a buyer company in exchange for shares in the buyer company. Herein, it is pertinent to note that shares can be transferred by way of this Agreement by an individual or a company. The transfer of shares under this arrangement is carried out in accordance with the manner that has been decided and provided by the company in its Articles of Association (AoA).

When the STA is entered into between a Shareholder and a Buyer Company for exchange of shares of the Buyer company, the STA is taken into consideration with the Share Purchase Agreement (SPA) and the Subscription Agreement (SA).

Furthermore, the resultant effect of the execution of such STA is that the company issues a new Transfer Certificate in the name of the Transferee which becomes binding on the new Shareholder, i.e., the Transferee after they are duly notified with a Stock Certificate by the company whose shares are transferred to them.

MEANING OF SHARE TRANSFER

Share Transfer forms the subject matter of the Share Transfer Agreement. However, transfer in the ownership of few specified shares is not the only objective achieved by this agreement. Under the Share Transfer Agreement, with the share transfer, the rights and duties of the member of the company that was holding that shares, are also transferred to the new or existing shareholder.

THE NEED OF DRAWING UP A SHARE TRANSFER AGREEMENT

 As discussed above, an STA is drawn up between two parties wherein a member of the company agrees to sell a specified number of shares to a Buyer Company at a mutually agreed price. The main aim behind drawing such STA is three-fold:

1. Firstly, the STA serves as proof of that both, the member of the company as well as the Buyer have mutually agreed to the terms and conditions of the Share Transfer transaction;
2. Secondly, the STA provides a safeguard to both parties by protecting their interests from unwanted and unintended consequences;
3. Thirdly, the STA lays down the rights and liabilities of the parties arising from the Share Transfer transaction.

PARTIES INVOLVED IN SHARE TRANSFER

An STA includes the following persons:

1. The Transferor
2. The Transferee
3. Legal Representatives of a deceased Transferor or Transferee, if any
4. The Public or Private (Listed or Unlisted) Company.

THE LAWS APPLICABLE TO SHARE TRANSFER AGREEMENT

The Share Transfer transaction between a member of a company and a Buyer is governed by the following laws:

1. Indian Stamp Act, 1899
2. Companies Act, 2013
3. Indian Contract Act, 1872

1. Indian Stamp Act, 1899

The Indian Stamp Act, 1899 (ISA) is the principal legislation that authorizes the Central Government (CG) to levy Stamp Duty on exchange of ‘Instruments’. Section 2(14) of the ISA defines the term ‘Instrument’ as any and every document that either creates a right or a liability or purports to be created, transfer, limit, extend, extinguish or record such rights and liabilities.

Since the STA transfers the rights and liabilities from the Seller to the Buyer, it is subject to the provisions of the ISA.  According to the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 (Stamp Duty Rules), notified by the Central Government in 2020, the rate of Stamp Duty on the transfer of shares, whether in physical or DEMAT form, is 0.015%.

2. The Companies Act, 2013

The procedure of Share Transfer is governed by the Companies Act, 2013 (The Act) which is the principal legislation that lays down the laws governing companies in India. The Act, under Section 44, clearly incorporates the principle of transferability of shares.

According to Section 44 of the Act, the nature of shares of any member in the company is, by its very nature, a ‘movable property’ and, therefore, capable of being transferred in the manner laid under the AoA of the company. The Act further provides, under Section 58(2), that the securities or interest of any member in a Public Company are also freely transferrable.

These shares can be transferred subject to the provisions of the AoA and if any transfer is made in contravention of the same, such transfer will become invalid. The same was also held by the Hon’ble Supreme Court of India (SC) in the case of John Tinson & Co. Pvt. Ltd. v. Mrs. Surjeet Malhan & Anr. [(1997) 88 Com Cases 750].

Section 56 of the Act lays down the provisions with respect to the procedure and conditions governing the transfer of shares. According to this provision, a company can only register and transfer securities through an instrument that is duly stamped, dated and executed by the Transferor and the Transferee. Herein, the term ‘duly stamped’ means that it should bear an adhesive or impressed stamp.

Furthermore, Section 19(1) of the Act incorporates a limitation with respect to the Share Transfer by prohibiting a transfer of shares of a Holding Company to its Subsidiary Company or Nominees of the Subsidiary Company. The provision further states that any transfer made in contravention to this limitation will be void.

If the Share Transfer transaction is in contravention to Section 56, then a company involved in such a transaction can be made liable to pay a minimum fine of Rs.25,000 extending to a maximum fine of Rs. 5,00,000.

3. Indian Contract Act, 1872

The Indian Contract Act, 1872 (Contract Act) is the principal legislation governing all kinds of contracts. Therefore, the provisions of the Contract Act with respect to the valid essentials of any contract and damages in event of a breach of contract provided as under Section 75 of the Contract Act are applicable to STAs.

AMLEGALS REMARKS

An STA is an essential instrument that incorporates the rights and liabilities arising from the Share Transfer transaction. Therefore, while drafting the STA, in order to make the Agreement valid, it should be made sure that the Clauses of the STA conform to the provisions of the procedure of Share Transfer as laid down under the Companies Act, the ISA as well as the essentials of a valid contract as provided under the Contract Act.

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