A company is a legal entity formed to carry out business activities, owned by shareholders who invest capital in exchange for shares. These shares represent ownership and can be bought, sold, or transferred depending on the terms set by the company. In many cases, shareholders wish to change their investment by transferring shares. In common parlance, “share transfer” and “share transmission” seem similar, but they refer to completely different processes. Share transfer involves the voluntary sale or transfer of shares between individuals or entities, with the consent of both parties. Share transmission, on the other hand, happens when there are circumstances like death, insolvency, or incapacity of a shareholder; the shares of the shareholder are passed on to its legal heirs or representatives.
Understanding the differences between these two is important for shareholders and companies, as each has its own set of legal and procedural requirements. This blog provides key differences, legal implications, and step-by-step processes for each.
What is Share Transfer?
Share transfer is the process by which a shareholder voluntarily transfers their ownership in a company to another party. This occurs when an individual or entity wishes to sell their shares to another person or institution. The transfer of shares can happen through sale after receiving the consideration or, in the case of public companies, via stock markets, where shares are traded.
Key Features of Share Transfer
- Voluntary Action: Share transfer occurs when a shareholder willingly transfers their shares to another individual or entity.
- Consideration Involved: It usually involves the exchange of money or other compensation based on the market value or agreed-upon terms.
- Documentation Required: A share transfer deed is executed between the transferor and transferee to establish the validity of the transfer.
- Approval by the Board: Private companies often require Board approval to regulate shareholding changes.
- Stamp Duty Payment: As per the Indian Stamp Act, stamp duty is levied on share transfers.
What is Share Transmission?
Share transmission refers to the process by which shares are transferred to a shareholder’s legal heirs or nominees due to events such as death, insolvency, or incapacity. Unlike share transfer, share transmission is governed by law and does not require the shareholder’s consent.
Key Features of Share Transmission
- Involuntary Process: It takes place due to inevitable circumstances, it does not occur due to voluntary actions.
- No Consideration Required: There is no exchange of money, as the shares pass to the rightful heirs or representatives.
- No Transfer Deed: In share transmission, no transfer deed is required.
- Legal Documentation:Â it requires documents including a death certificate, succession certificate, or probate of the will.
- No Stamp Duty: Unlike share transfer, share transmission is not subject to stamp duty.
- Board Approval: Companies generally verify and approve the transmission before updating records.
Legal Provisions Governing Share Transfer and Transmission in India
Both processes are regulated under:
- Companies Act, 2013 (Section 56): It lays out the procedures for share transfer and transmission.
- SEBI (LODR) Regulations, 2015: The act is applicable to listed companies for compliance.
- Indian Stamp Act, 1899: It governs stamp duty on share transfer transactions.
Types of Share Transfers
- Voluntary Share Transfer: When shareholders willingly sell or transfer shares.
- Compulsory Share Transfer: When a company mandates a shareholder to transfer shares due to non-compliance, agreement clauses, or buyback policies.
Types of Share Transmission
- Transmission Due to Death: Shares are transferred to the legal heir/nominee.
- Transmission Due to Insolvency: The Court assigns shares to a receiver.
- Transmission Due to Incapacity: Shares are transferred to a legally appointed guardian.
Step-by-Step Process of Share Transfer
- Check the Articles of Association (AoA): Review the company’s AoA for any restrictions on share transfers.
- Execute the Share Transfer Deed: A legal document signed by the transferor and transferee, specifying details of the transfer.
- Pay the Stamp Duty: Stamp duty must be paid as per the value of the shares being transferred.
- Submit the Transfer Form to the Company, Along with the share certificates and transfer deed.
- Company Approval & Register Update: The company verifies and records the transfer in its register of members.
- Issuance of New Share Certificates: The transferee receives new share certificates reflecting the updated ownership.
Step-by-Step Process of Share Transmission
- Notify the Company: Inform the company about the shareholder’s demise, incapacity, or insolvency.
- Submit Required Documents: Provide documents such as the death certificate, succession certificate, and probate of will.
- Company Verification and Approval: The company reviews and verifies the claim.
- Update the Register of Members: Legal heirs or nominees are officially recorded as new shareholders.
- Issuance of New Share Certificates: The company issues new certificates in the name of the rightful successors.
Differences Between Share Transfer and Share Transmission
| Feature | Share Transfer | Share Transmission |
| Nature | It is a voluntary process that occurs due to the deliberate action of the parties. | It is an involuntary process that occurs due to insolvency, death, the lunacy of the shareholder, or inheritance. Etc. |
| Consideration | Involves monetary exchange for share transfer. | No monetary exchange |
| Documentation | Share Transfer Deed, Share Certificate | Death Certificate, Succession Certificate, etc. |
| Approval Needed | Board of Directors’ approval (for private companies) | The company’s verification and approval |
| Stamp Duty | Required | Not required |
Tax Implications of Share Transfer
1. Capital Gains Tax for the Transferor
Sale of Shares: When shares are sold, the transferor realizes a capital gain or loss. The tax treatment depends on the holding period:
- Short-Term Capital Gains (STCG): If shares are held for 24 months or less, gains are considered short-term and taxed at the individual’s applicable income tax slab rates.
- Long-Term Capital Gains (LTCG): For shares held for more than 24 months, gains are long-term. As per the Finance Act 2024, LTCG on all assets is taxed at 12.5%, and the benefit of indexation has been abolished.
2. Taxation for the Transferee
Receiving Shares as a Gift:
- From Relatives: Gifts received from specified relatives are exempt from tax. Relatives include spouses, siblings, siblings of the spouse, lineal ascendants or descendants, and their spouses.
- From Non-Relatives: If the aggregate value of shares received without consideration exceeds ₹50,000 in a financial year, the entire value is taxable as “Income from Other Sources” in the hands of the recipient.
3. Securities Transaction Tax (STT)
STT is levied on the sale of shares listed on a recognized stock exchange in India. As of April 1, 2023, the STT rate for the sale of an option in securities is 0.0625%, and for the sale of futures in securities, it is 0.0125%.
Tax Implications of Share Transmission
Share transmission occurs due to the operation of law, such as the death of a shareholder, leading to the transfer of shares to legal heirs or nominees. The tax considerations include:
1. Inheritance Tax:
India does not levy any inheritance tax. Therefore, the mere transmission of shares to legal heirs does not attract any immediate tax liability.
2. Capital Gains Tax on Subsequent Sale:
- Cost of Acquisition: The inheritor’s cost of acquisition of the shares is deemed to be the original purchase price paid by the deceased shareholder.
- Holding Period: The deceased’s holding period is also considered to determine whether the gain is short-term or long-term. This means the period for which the deceased held the shares is added to the period for which the inheritor holds them.
- Tax on Sale: Upon selling the inherited shares, the inheritor will be liable to pay capital gains tax based on the holding period and the applicable tax rates.
Conclusion
Both share transfer and share transmission play a crucial role in managing company ownership and ensuring smooth transitions in corporate shareholding. While share transfer is a voluntary process that allows shareholders to sell or transfer their shares to another party in exchange for consideration, share transmission happens due to unavoidable circumstances such as death, insolvency, or incapacity of a shareholder, where shares are legally passed on to the rightful heirs or nominees.
To maintain compliance with corporate laws and avoid disputes, shareholders, investors, and company management must be aware of the legal and procedural distinctions between these two processes. These procedures are governed by the Indian Stamp Act, SEBI regulations, and the Companies Act of 2013, which establish precise rules for taxation, permissions, and documentation.
Frequently Asked Questions
1. Is stamp duty mandatory for a share transfer?
Yes, stamp duty is required for the share transfer and it is paid on the market value of the shares.
2. How long does the share transmission process take?
The process usually takes a few weeks, depending on document verification and company approval.
3. What happens if a shareholder dies without a nominee?
The shares are transmitted based on legal heirship and succession laws.
4. Can a company refuse to share transmission?
A company cannot refuse transmission if legal documents are in order.
5. What is the role of the Board of Directors in share transfer?
In private companies, the board must approve the transfer.
6. Do I need a lawyer for share transmission?
It is not mandatory; legal assistance can be helpful in complex cases.
7. Can shares be transferred online?
Yes, in demat form, shares can be transferred electronically.
8. Is share transfer applicable to public companies?
Yes, but public company shares are freely transferable unless restricted by regulations.
