A share transfer is the voluntary movement of ownership in a company's shares from an existing shareholder (the transferor) to another person (the transferee), together with the rights and obligations attached to those shares. It is governed by Section 56 of the Companies Act, 2013 read with Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014, and for physical shares is carried out through a written instrument of transfer in Form SH-4.
How a share transfer works
The mechanics depend on whether the shares are held in physical or dematerialised form. For physical shares in a Private Limited company, the steps are:
- The transferor and transferee execute a duly stamped Form SH-4 stating the consideration and details of the shares.
- The instrument, along with the original share certificate (or letter of allotment), is delivered to the company within 60 days of execution.
- The Board of Directors considers the transfer and either approves or refuses it.
- Once approved, the company records the change in its Register of Members (Section 88) and issues a fresh certificate to the transferee within one month of receiving the instrument.
Demat is now mandatory for most private companies
Under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, every private company that is not a small company (as defined in Section 2(85)) had to dematerialise its securities by 30 June 2025. For these companies the physical SH-4 route is effectively closed: shares must already be in demat form and are transferred electronically through a depository participant via NSDL or CDSL. A company that missed the deadline cannot issue new securities or carry out buy-backs, and its members cannot transfer physical shares until dematerialisation is complete. The SH-4 process above now applies mainly to small companies and other exempt entities that still hold shares physically.
Stamp duty on transfer
Stamp duty under the Indian Stamp Act, 1899 is a mandatory levy on the instrument of transfer and is usually borne by the transferee. The rate turns on how the shares are held:
| Type of transfer | Stamp duty rate | How it is paid |
|---|---|---|
| Physical shares (Form SH-4) | 0.25% of consideration or value | Share-transfer stamps affixed / franking |
| Dematerialised shares (delivery basis) | 0.015% of consideration | Auto-collected by NSDL / CDSL |
| Transfer of debentures | 0.0001% of consideration | Collected by the depository |
Since the uniform securities stamp-duty regime took effect on 1 July 2020, demat transfers attract just 0.015% against the older 0.25% on physical transfers, a further reason most transactions now run through the depository.
Restrictions in private companies
A Private Limited company, by definition, restricts the right to transfer its shares, and the Articles of Association usually provide a right of first refusal for existing shareholders alongside a Board-approval requirement. If the company refuses to register a transfer, Section 58 requires it to send a notice of refusal, with reasons, to both parties within 30 days of the instrument being delivered. The transferee may then appeal to the National Company Law Tribunal (NCLT) within 30 days of receiving that notice.
Common mistakes to avoid
- Leaving the SH-4 undated or under-stamped: an improperly stamped instrument is invalid and the transfer cannot be registered.
- Missing the 60-day delivery window, which forces the parties to re-execute the deed.
- Ignoring valuation rules: transfers involving non-residents must follow FEMA pricing guidelines, and a consideration below fair value can attract tax in the transferee's hands under Section 56(2)(x) of the Income-tax Act.
- Assuming physical transfer is still permitted after failing to dematerialise under Rule 9B.