Shares in a private company change hands for every reason — a co-founder leaves, family restructures, an investor enters quietly — and the law prescribes an exact ritual: instrument SH-4, stamp duty, board approval, register entries. Skip steps and the 'transfer' everyone believes happened may not exist legally, surfacing years later in diligence or succession fights. Here is the complete procedure with its commercial and tax edges.
First gate: the articles
A private company's articles must restrict transfers (that's what makes it private) — typically via right of first refusal/offer to existing members, board discretion to refuse, or named-party consent requirements. Any transfer starts by reading and satisfying these clauses: offers made to existing shareholders per the ROFR mechanics, waivers collected in writing, and any SHA-level transfer provisions (tag-along obligations, lock-ins, investor consents) honoured. Transfers executed in breach are voidable and poison later rounds' diligence.
The statutory procedure
- Execute Form SH-4 (the securities transfer instrument): transferor and transferee sign, witnessed, with consideration, share particulars and folio details
- Stamp duty: 0.25% of the greater of consideration or market value — via the states' e-stamping/franking or the pan-India securities-duty machinery; unstamped instruments are the classic fatal defect
- Deliver SH-4 + original share certificates to the company within 60 days of execution
- Board meeting approves (or, exercising the articles' powers, refuses with reasons — refusals are appealable by transferees)
- Company endorses certificates, updates the register of members, and issues new certificates within one month
- The change reflects publicly at the next annual return (MGT-7 shareholding tables) — there is no immediate ROC 'transfer form'
Private companies are being phased into demat: following the amended rules, non-small private companies must facilitate dematerialisation, and new issues/transfers route through demat for covered companies (timelines extended for genuine small companies). For dematted shares, transfers execute through depository instructions rather than SH-4 — but the articles' restrictions and board processes still govern. Check your company's demat status before choosing the mechanics.
Valuation and tax: the edges that bite
Price is not free-floating: Section 56(2)(x) taxes a transferee receiving shares below fair market value (Rule 11UA valuation) on the discount; Section 50CA deems FMV as the transferor's consideration when selling below it. So off-market transfers between unrelated parties should carry an FMV working (a merchant banker/CA Rule 11UA computation) in the file. Capital gains apply to the transferor (unlisted shares: 24-month holding for long-term; rates per current law), and transfers involving non-residents add FEMA pricing guidelines and reporting (FC-TRS within 60 days) — a layer that absolutely needs professional handling. Family transfers via gift between defined relatives escape 56(2)(x) and can be efficient succession tools — executed by gift deed with the same SH-4/registration mechanics.
Transmission: the no-consideration cousin
Death moves shares by transmission, not transfer: heirs apply with death certificate and succession evidence (will/probate/succession certificate per the company's articles and prudence thresholds), no SH-4 and no stamp duty on transmission itself, and the board registers the claimant. Companies should adopt a transmission policy (document thresholds by value) so grieving families face a checklist, not improvisation. Nominations (SH-13) simplify the path where made — encourage every shareholder to file them.
How Aidwish helps
Aidwish executes share transfers cleanly — articles/SHA compliance checks, SH-4 and stamping mechanics, FMV valuations, FEMA filings for cross-border parties, and register/certificate hygiene — so ownership changes survive every future diligence.