Share Transfer in a Private Limited Company — Procedure and Compliance

Shares in a private limited company can be transferred — but with greater restrictions than public companies. Private limited companies typically have Articles of Association (AOA) provisions including right of first refusal (pre-emption rights) for existing shareholders. Here is the complete step-by-step guide to share transfer in a private limited company.

Step 1 — Check AOA for Restrictions

• Review the company's AOA — most private companies have clauses requiring the transferor to first offer shares to existing shareholders before transferring to an outsider
• Right of First Refusal (Pre-emption): Existing shareholders have the right to buy shares at the offered price before the shares can be transferred to an outside party
• If AOA requires Board/General Meeting approval for transfers — obtain it before proceeding

Step 2 — Execute Share Transfer Deed (Form SH-4)

• The transferor and transferee sign Form SH-4 (Instrument of Transfer) as prescribed under the Companies Act 2013
• SH-4 must contain: Name of company, share certificate number, number of shares, consideration, name and signature of transferor and transferee, witness details
• Affix stamp duty on Form SH-4: 0.25% of the higher of consideration paid or market value of shares (as per the applicable State Stamp Act — Kerala stamp duty applies)

Step 3 — Board Resolution

• The transferor delivers Form SH-4 (duly stamped) along with the original share certificate to the company
• The Board of Directors passes a resolution approving the transfer — at the next Board meeting
• Board can reject the transfer only on grounds specified in the AOA

Step 4 — Update Registers and Issue New Certificate

• Update the Register of Members (SH-1) — remove the transferor's name and add the transferee's name
• Update Register of Transfers (SH-6)
• Issue a new Share Certificate to the transferee (signed by directors and affixed with company seal if applicable) within 2 months of Board approval
• Cancel the old share certificate

Tax Implications of Share Transfer

• Capital gains tax on transferor — Section 50CA (if shares transferred below FMV — SDV provisions apply)
• If shares held for more than 24 months: Long-term capital gains at 20% with indexation (unlisted shares)
• If held 24 months or less: Short-term capital gains at slab rate
• Buyer: Section 56(2)(x) if shares acquired below FMV — difference is taxable

Conclusion

Share transfer in a private company involves AOA compliance, duly stamped SH-4, Board approval, register updates and a new share certificate — along with careful tax planning. SPOTON provides end-to-end share transfer compliance and capital gains advisory for private limited companies across Kerala. Contact us for expert corporate compliance services.