Under Section 2(68) of the Companies Act, 2013, a “private company” means a company having a minimum paid-up share capital as may be prescribed and which, by its Articles, restricts the right to transfer its shares. This restriction is constitutionally embedded in every private company — Table F of Schedule I to the Act provides default articles that include a right-of-first-refusal mechanism and board approval requirement for transfers.
Practically, this means:
At Virtual Auditor, we review the AoA and SHA before advising on any transfer to ensure the procedure complies with both the statutory requirements and the contractual covenants. For companies choosing the right structure, see our Pvt Ltd vs LLP vs OPC comparison.
Here is the procedure we follow at Virtual Auditor for every share transfer engagement:
Check the AoA for: transfer restrictions, pre-emptive rights (right of first refusal), board approval requirements, and any prohibition on transfer to certain classes of persons. If an SHA exists, verify compliance with tag-along, drag-along, lock-in, and consent requirements (investor consent is often required for founder share transfers).
Valuation is required for:
Form SH-4 is the prescribed instrument of transfer under Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014. The SH-4 must contain:
Under Article 62 of Schedule I to the Indian Stamp Act, 1899, the stamp duty on a transfer of shares is 25 paise for every Rs 100 or part thereof of the consideration amount or the market value, whichever is higher. Key points:
The transferor or transferee lodges the duly executed and stamped SH-4 along with the original share certificate with the company. Under Section 56(1), the company shall not register a transfer unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and the transferee has been delivered to the company along with the certificate.
The board of directors considers the transfer request at a board meeting. The board verifies:
If the board approves, it passes a resolution approving the registration of transfer.
Under Section 56(4), the company must register the transfer and deliver a new share certificate to the transferee within one month from the date of receipt of the transfer deed (or within one month from the date of allotment in case of transmission). In practice, the steps are:
A simple share transfer between existing resident shareholders does not require ROC filing. However, the annual return in Form MGT-7/MGT-7A must reflect the updated shareholding pattern. If the transfer results in a change in the significant beneficial ownership (SBO) threshold (10% or more under Section 90), Form BEN-2 must be filed within 30 days.
Under Section 58(2), if the board refuses to register the transfer, it must send a notice of refusal to the transferor and the transferee within 30 days from the date of receipt of the instrument of transfer, specifying the reasons for refusal. If no communication is sent within 30 days, the transfer is deemed to have been registered.
The aggrieved party (transferor or transferee) may appeal to the NCLT under Section 58(4) within 30 days of the refusal or 60 days from the date of lodging the transfer deed (if no communication is received). The NCLT may direct the company to register the transfer within 10 days of its order.
Under Rule 11UA of the Income Tax Rules, 1962, the Fair Market Value of unlisted equity shares is determined as follows:
| Method | Applicable When | Certified By |
|---|---|---|
| Net Asset Value (NAV) | FMV = (A – L) / PE, where A = book value of assets, L = book value of liabilities, PE = total paid-up equity shares, as on the valuation date based on the last audited balance sheet | Chartered Accountant |
| Discounted Cash Flow (DCF) | Present value of future cash flows discounted at an appropriate rate; projections typically for 5 years with terminal value | SEBI-registered Merchant Banker or Chartered Accountant (for certain assessees) |
For resident-to-resident transfers, both methods are available. The assessee can choose the method that gives a higher FMV (to demonstrate the transaction is at or above FMV). Our valuation practice regularly issues both NAV and DCF certificates for share transfer purposes.
For transfers involving non-residents (NRIs, foreign companies, FPIs), the pricing guidelines under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 apply:
The key difference from income tax valuation: FEMA valuations act as a floor price (for outbound transfers) or ceiling price (for inbound transfers), whereas income tax valuation determines the FMV for taxability purposes. We handle both simultaneously to ensure the transaction price satisfies both regulators. See our FEMA valuation certificate guide for details.
Most share transfers between a resident and an NRI/PIO (Person of Indian Origin) fall under the automatic route — no prior RBI approval is needed, provided:
Under Regulation 13 of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, the FC-TRS form must be filed with the RBI through the Authorised Dealer (AD) bank within 60 days of the transfer. The FC-TRS must be accompanied by:
Late filing of FC-TRS attracts compounding proceedings under Section 15 of FEMA, 1999. We have covered FEMA penalties in detail in our FEMA penalties and compounding guide.
The consideration for the share transfer must be paid through:
Cash payment or payment through hawala channels is strictly prohibited and constitutes a FEMA contravention.
| Aspect | Short-Term (STCG) | Long-Term (LTCG) |
|---|---|---|
| Holding Period | Less than 24 months (unlisted shares) | 24 months or more (unlisted shares) |
| Tax Rate | Normal slab rates (up to 30% + surcharge + cess) | 12.5% (above Rs 1.25 lakh exemption, without indexation from FY 2024-25) |
| Deemed Consideration | Higher of actual consideration or FMV under Section 50CA | Higher of actual consideration or FMV under Section 50CA |
If the transferee (buyer) receives shares for a consideration less than the FMV and the aggregate FMV of such shares exceeds the consideration by more than Rs 50,000, the difference is taxable as “Income from Other Sources” in the hands of the buyer under Section 56(2)(x). Exemptions are available for transfers between relatives (as defined in the Explanation to Section 56(2)(x)), transfers under will or inheritance, and certain other specified situations.
If unlisted shares are transferred at a price less than the FMV determined under Rule 11UA, the FMV is deemed to be the full value of consideration for the purpose of computing capital gains in the seller’s hands. This prevents sellers from artificially depressing the transfer price to reduce capital gains liability.
If the transferor is a non-resident, the buyer (transferee) must deduct TDS under Section 195 on the capital gains portion. The TDS rate depends on the DTAA (Double Taxation Avoidance Agreement) between India and the transferor’s country of residence. A lower deduction certificate under Section 197 can be obtained if the actual tax liability is lower than the statutory TDS rate.
Transmission differs from transfer — it occurs by operation of law (death, succession, insolvency), not by voluntary deed. The legal heir or nominee applies to the company with:
The company registers the transmission and issues a new share certificate in the name of the legal heir within one month under Section 56(4). No stamp duty is payable on transmission. No board approval is technically required (as transmission is by operation of law), though the board typically passes a resolution recording the transmission.
Our integrated Company Secretary and Valuation practices make us uniquely positioned to handle share transfers end-to-end:
Check our pricing or book a consultation.
Procedure: Execute Form SH-4 (share transfer deed) with proper stamp duty (25 paise per Rs 100 under the Indian Stamp Act). Lodge with the company along with the original share certificate. Board approves the transfer (private companies have mandatory transfer restrictions under Section 2(68)). Company registers the transfer and issues a new certificate within 1 month (Section 56(4)).
Valuation: Required under Rule 11UA (Income Tax) using NAV or DCF method. Required under FEMA NDI Rules for non-resident transfers. Acts as floor/ceiling for pricing under FEMA; determines FMV for Section 50CA (deemed consideration) and Section 56(2)(x) (buyer-side income).
FEMA/NRI: Resident-to-NRI and NRI-to-Resident transfers are on the automatic route for most sectors. FC-TRS reporting mandatory within 60 days through AD bank. NRI-to-NRI transfers require RBI approval. Payment must be through banking channels (NRO/NRE account or inward remittance).
Tax: STCG at slab rates (holding < 24 months). LTCG at 12.5% without indexation (FY 2024-25 onwards). Section 195 TDS for non-resident sellers.
Share transfer in a private company requires: (1) execution of a Share Transfer Deed in Form SH-4, (2) payment of stamp duty (typically 25 paise per Rs 100 of consideration or market value, whichever is higher), (3) submission of SH-4 along with the share certificate to the company, (4) board approval by resolution, (5) registration of transfer in the Register of Members within 30 days, and (6) issuance of new share certificate within 30 days of registration. The transfer is governed by Section 56 of the Companies Act, 2013.
Valuation is required in several scenarios: (1) under Section 56(2)(x) of the Income Tax Act, if shares are transferred for a consideration less than FMV and the shortfall exceeds Rs 50,000; (2) under FEMA regulations, transfers involving NRIs or foreign nationals must be at fair value determined by a SEBI-registered merchant banker or a Chartered Accountant; (3) under Section 50CA, if unlisted shares are transferred below FMV, the FMV is deemed as full value of consideration for computing capital gains.
Yes, but FEMA regulations apply. An NRI can transfer shares to a resident Indian on the automatic route at a price not exceeding the fair value. Transfer from NRI to another NRI requires RBI approval. FC-TRS reporting to RBI through the AD bank is mandatory within 60 days of the transfer.
Yes. Under Section 58(2), if a private company’s Articles of Association contain restrictions on share transfer, the board may refuse to register the transfer. However, the board must send a notice of refusal with reasons within 30 days. The aggrieved party may appeal to the NCLT under Section 58(4).
Under the Indian Stamp Act, 1899, stamp duty on transfer of shares is 25 paise for every Rs 100 or part thereof of the consideration or market value, whichever is higher. State-specific rates may vary. E-stamping is available through the SHCIL platform in most states.
Key provisions: Section 50CA deems FMV as sale consideration if actual price is lower; Section 56(2)(x) taxes the shortfall in the buyer’s hands if it exceeds Rs 50,000. STCG (holding below 24 months for unlisted shares) is taxed at slab rates; LTCG at 12.5% without indexation (from FY 2024-25). TDS under Section 195 applies if the seller is a non-resident.
Virtual Auditor — AI-Powered CA & IBBI Registered Valuer Firm
Valuer: V. VISWANATHAN, FCA, ACS, CFE, IBBI/RV/03/2019/12333
Chennai (HQ): G-131, Phase III, Spencer Plaza, Anna Salai, Chennai 600002
Bangalore: 7th Floor, Mahalakshmi Chambers, 29, MG Road, Bangalore 560001
Mumbai: Workafella, Goregaon West, Mumbai 400062
Phone: +91 99622 60333 | Email: support@virtualauditor.in
Book a Consultation