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Elaborating The Difference Between the Transmission of Shares & Transfer of Shares
21, Jan 2025
When an asset changes hands, it's called a transfer. This change could involve the physical relocation of the asset, the transfer of ownership rights, or both. In the case of securities, transfers can be either voluntary, where the current holder chooses to transfer them, or mandatory, as dictated by law. Transferring shares, for instance, is a voluntary action initiated by the shareholder through a contractual agreement. Conversely, the transmission of shares occurs automatically due to legal procedures, such as upon the shareholder's death or if they become insolvent or incapacitated.
What is the Transfer of Shares?
Transferring shares involves purposefully passing ownership of the shares from the transferor to the transferee. In the case of a public company, shares can generally be transferred without restriction, unless the company has valid grounds to prevent it. However, in a private limited company, share transfers are limited, except in specific circumstances. To effect the transfer, a transfer deed is typically drawn up and executed.
Why Does Share Transfer Occur?
Share transfers occur for various reasons, each involving the transfer of ownership from one party to another:
- Sale Transaction: The original holder sells shares to a buyer in exchange for monetary consideration, facilitated by a share transfer deed.
- Gifting: Shares are voluntarily given to another eligible recipient as a gift, without monetary exchange, typically formalized through a gift deed.
- Lending Shares: In securities lending, shares are temporarily transferred from lender to borrower as collateral, with reversion to the lender after the lending period ends.
- Transmission Errors: Incorrect recording of shares, especially in joint ownership structures, may necessitate technical transfers for rectification. For instance, shares recorded only under a grandparent instead of under a lineage of grandparent, father, and child, may require a technical transfer through the father for correction.
These scenarios demonstrate the diverse situations in which legal ownership of shares changes hands between parties or entities.
Duration for Finalizing Share Transfers
According to SEBI regulations, listed companies are required to finalize share transfer procedures promptly. Demat requests must be completed within 15 days of receipt, while physical share certificates submitted should be processed within 1 month. Any delays beyond these stipulated timelines can result in companies being liable for paying penal interest to affected shareholders.
In instances where share transfer requests are rejected due to discrepancies in documentation or if the company declines the transfer for specific reasons, the applicant must be notified within 30 days of receipt. This notification should include detailed reasons for the rejection, enabling the applicant to take corrective measures if necessary.
What is the Transmission of Shares?
Transmission of shares occurs automatically as a result of legal circumstances, such as the death of the shareholder, their incapacity due to lunacy, or insolvency. Similarly, if the shareholder is a company that has been dissolved, transmission occurs. Unlike in the transfer of shares, there is no requirement for a transfer deed. Instead, the rights to the shares are passed directly to the transferee, with transmission being officially recognized once the transferee provides evidence of their entitlement. In the event of the shareholder's death, the shares are transferred to their legal representative, while in cases of insolvency, they are transferred to the official assignee.
Reasons for Share Transmission
Share transmission typically occurs due to the following common situations, primarily revolving around the death of the original shareholder:
a) Absence of Nominee Registration:
- Transfer of shares through the execution of a will, wherein the shares are bequeathed to legal successors.
- Application of succession laws, particularly in cases where no will exists, determining the distribution of assets.
b) Nominee(s) Registered:
- Direct transfer of shares to the nominee(s) as per the shareholder's nomination form directive.
- Instances where Class I heirs reject shares, leading to the transmission of shares to Class II nominees with limited rights.
In essence, the occurrence of shareholder demise, coupled with nomination or proper succession planning, facilitates share transmission, averting potential legal complexities surrounding ownership disputes by establishing clear succession rights.
Timeline for Completing Transmission of Shares
Due to the intricacies involved in verifying legal heirship claims, the regulatory timelines for completing the transmission process are relatively extended. As per SEBI regulations, companies are obligated to finalize transmission formalities within a timeframe of 1 to 3 months from the submission date, depending on whether the shares are held in physical or dematerialized (demat) form.
Failure to adhere to these timelines by companies may necessitate compensatory measures, such as the payment of penal interest to the legal heirs, akin to delays observed in share transfers. Additionally, companies are required to provide status updates within 20 days, elucidating the processing stage of the transmission request and specifying the expected completion timelines.
Provisions in the Companies Act, 2013 and Companies (Share Capital & Debenture) Rules, 2014 Govern the Processes of Transfer of Shares and Transmission of Shares:
Transfer of Shares:
Share transfer occurs upon submission of a proper instrument of transfer, Form SH-4, as outlined in Rule 11 of the Companies (Share Capital & Debenture) Rules, 2014. This document must be duly stamped, dated, and executed by or on behalf of both the transferor and the transferee, detailing essential information such as names, addresses, and occupations. It should be delivered to the company by either party within 60 days of execution, along with the relevant securities certificate or letter of allotment. In cases of transfer of partly paid shares, the transferor must provide Form SH-5, as per sub-rule 3 of Rule 11, to the transferee, who must then give their no objection within 2 weeks of receiving the notice.
Transmission of Shares:
Transmission of shares occurs when the application, accompanied by pertinent documents, is deemed valid. Unlike in share transfer, the execution of a transfer deed is not necessary. The required documents for share transmission include a certified copy of the death certificate, a self-attested copy of PAN, relevant legal documents such as a succession certificate, probate of will, will, letter of administration, or court decree, and the specimen signature of the successor.
Consequences of Non-Compliance
Failure to comply with the aforementioned regulations incurs penalties. If a company fails to adhere to these rules, it faces a fine ranging from Rs. 25,000 to Rs. 5,00,000. Additionally, any officer of the company found to be in default may be subject to a fine ranging from Rs. 10,000 to Rs. 1,00,000.
While both share transfer and share transmission involve changing ownership of shares, they differ in initiation. Share transfer is voluntary, initiated by either the transferee or transferor, whereas share transmission is enforced by law, initiated by the legal representative or receiver.
In summary, understanding the difference between transfer and transmission of shares is crucial for managing ownership changes in listed company securities efficiently. Share transfer involves the intentional sale or gifting of shares, requiring thorough documentation and active participation from both parties. On the other hand, share transmission occurs automatically upon the death of a shareholder, with shares inherited by legal heirs or nominees. While transfer procedures typically take 15 to 30 days, transmission may require 1 to 3 months due to complexities in verifying legal heirship. While transfer incurs various costs, transmission usually involves fewer expenses. Investors must grasp these distinctions, understand the required documentation, processing timelines, and associated costs to direct ownership changes effectively and avoid complications. Clarity on whether a situation warrants transfer or transmission procedures ensures a smooth transition.
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