TRANSFER OF SHARES – THE MANY PERSPECTIVES

TRANSFER OF SHARES – THE MANY PERSPECTIVES

Madhusudan Bose and Lavanya Chawla¹

• Introduction

• • Transfer of shares is perhaps among the most scrutinized subjects in company law. ​​ Yet it is interesting how some of the most basic questions on the subject still require deliberation and evoke interesting perspectives.

• •  Consider for instance a simple situation of Mr. ‘A’, an investor, ​​ executing transfer of listed and unlisted shares​​ as of March 31. ​​ Depending on intervening holidays and time taken by the target company​​ / depository​​ for registration of transfer of shares, the transferee could get the physical / demat shares in his name anytime between April 1 to April 15.

• •  This begs the question –​​ on​​ what date did Mr. A cease to be owner of these shares? ​​ 

• • In​​ the case​​ of physical shares, would transfer of shares get postponed to the date of registration of transfer by the target company? ​​ If Mr. A draws up his balance sheet as of March 31, can be still show himself to the owner of the physical shares?​​ How then does he account for the money he received for​​ the sale​​ of physical shares?​​ 

• • In​​ the case​​ of demat shares, would Mr. A be deemed to have transferred the shares on March 31 when he executed the trade, or would it be the date on which the demat shares were debited from his account, or would it be the date on which the​​ demat shares are credited to the​​ transferee?​​ Importantly, can the target company consider Mr. A to be​​ a​​ shareholder on March 31?​​  ​​ ​​​​ 

Illustrative table: When is transfer complete?

* On assumptive basis​​ -​​ stock market trades are likely to be settled sooner.

• Transfer of physical shares – When complete

Statutory provisions

• • Sec. 56 of the Companies Act provides that​​ a company shall not register a transfer of securities​​ of the company ​​ unless:

• A proper instrument of transfer in the prescribed form is duly stamped, dated and executed by or on behalf of the transferor and transferee; and​​ 

• Delivered to the company by the transferor or transferee within a period of 60 days by the transferor or the transferee.

• • Sec. 56 is limited in its application to physical shares only.​​ 

Summary of judicial precedents

• • A study of different judicial precedents reveals that the transfer of physical shares becomes effective at different points of time for different stakeholders.​​ The judicial precedents on this matter can be summarized as under:

• • • • Transfer when complete between transferor and transferee: A transfer of physical shares is complete as between the transferor and transferee when all​​ the formalities such as execution of the transfer deed and handing over the share certificates are complete.² ​​​​ 

This is​​ based on the assumption​​ that the transfer of shares is in accordance with the Articles of Association and there is no obstacle in the Articles of the company or otherwise which would entitle the company to reject the transfer of shares. ​​​​ 

• • • • Transfer when complete between the company and transferee: ​​ A transfer of shares effective between the transferor and transferee is not effective as against the company and any person without notice of the transfer until the transfer is registered in the company’s register³.​​ The transfer becomes complete and the transferee becomes a shareholder in the true and full sense of the term with all the rights of a shareholder, only when the transfer is registered in the company’s register⁴.​​ 

• • • • Effective date of transfer:​​ Upon registration, the transfer of shares becomes effective from the date the transfer was first made⁵.​​ 

Judicial reasoning​​ behind​​ different​​ “effective​​ dates” of transfer for different stakeholders

• • Why do the courts acknowledge that transfer of shares may be complete between​​ the​​ transferor and transferee even before registration of transfer by the target company?  ​​​​ The rationale behind this is interesting.​​ 

• • The first hint is in the language of the Companies Act itself. ​​ Sec.56 of the Companies Act, 2013 states that a company shall not​​ “register a transfer of securities”​​ unless prescribed conditions are satisfied. ​​ This​​ indicates that​​ the​​ Companies Act itself​​ “pre-supposes that transfer has already taken place”​​ between the transferor and transferee⁶, and the Companies Act merely prescribes the supplemental conditions for registration (or completion) of transfer in the records of the company.​​ 

Again, it is important to appreciate that “shares” are “property” as defined in the Transfer of Property Act, 1882​​ (“ToP Act”), and “goods” within the meaning of Sale of Goods Act, 1930. ​​ Therefore, the fundamental law relating to transfer of shares is essentially the ToP Act and the Sale of Goods Act, and the Companies Act essentially contains supplementary conditions for completion of transfer.

• • The​​ landmark​​ ruling on this question was given by the Supreme Court in Re: Vasudev Ramchandra Shelat supra⁷.​​ 

In the above case, “Ms. A”, a shareholder executed a registered gift deed purporting to donate the disputed shares in various companies to her brother. ​​ Before she died, she had signed several blank transfer forms, apparently intended to be filled in by the donee so as to enable​​ the donee​​ to obtain the transfer of the​​ gifted​​ shares in the registers of various companies. ​​ Before the​​ donee​​ could register the transfer of shares in the registers of various companies, Ms. A passed away. ​​ 

The question before the Supreme Court was, whether the gift of shares from Ms. A to ​​ her brother had been completed, or whether in the absence of registration​​ of transfer, the gift was incomplete and therefore the shares​​ would be​​ dealt with in accordance with the laws of succession​​ as part of Ms. A’s estate.

• • The​​ Supreme Court ruled that the gift of shares in favour of Ms. A’s brother had been duly completed as between Ms. A and her brother as no obstacle was shown to exist which prevented Ms. A’s brother from registering the transfer of shares in his name in the registers of different companies. ​​ The Supreme Court made its decision based on the​​ following​​ rationale:

• • • • Companies Act and Transfer of Property Act have to be read harmoniously: The Supreme Court observed that the Companies Act, 1913 is not a law relating to transfer of property. ​​ In fact, it is Sec. 6 of the Transfer of Property Act, 1882 which covers transfer of shares by virtue of the wide definition of “property” as used in that section. ​​ Shares also come within the scope of “goods” under the​​ Sale of Goods Act.​​ The Companies Act, 1913 does not really prescribe the mode of transfer but lays downs the provisions for “registration” of a transfer. ​​ In other words, it presumes that a transfer has already taken place.⁸⁹​​ 

• • • • Two kinds of rights in shares: The Supreme Court observed that a distinction has to be made between​​ "the title to get on the register" and "the full property in the shares in a Company." The first is acquired by mere delivery, with the required intention, of the share certificate and a blank form signed by the transferor. The second is only obtained when the transferee, in exercise of his right to become a shareholder, gets his name on the register in place of the transferor.​​ This antecedent right in the person to whom the share certificate is given with a signed blank transfer form under a transaction meant to confer right or title upon him to become a shareholder, is enforceable so long as no obstacle to it is shown to exist in any of the articles of association of a company or a person with a superior right or title, legal or equitable does not appear to be there.​​ Sec. 6 of the Transfer of Property Act justifies such a splitting up of rights constituting "property" in shares just as it is well recognised that rights of ownership of a property may be split up into a right to the "corpus" and another to the "usufruct"¹⁰​​ of the property and then separately dealt with.”¹¹

• • To conclude, if a transferee has​​ received​​ share transfer deeds​​ for transfer of shares in favour of the transferee​​ and there is no further obstacle to prevent the registration of transfer of shares​​ in favour of the​​ transferee, the transfer is complete between the transferor and transferee.​​ 

However, the​​ target company itself would not be bound by such transfer till the transfer is registered in the register​​ of members, as essentially all rights under the Companies Act vests with “members” of the company.

• Transfer of demat shares – when complete

Off-market trades

• • A transfer of demat shares is effected by execution of a delivery instruction slip (DIS) by the transferor instructing his depository participant to effect the transfer of demat shares in favour of the transferee.​​ 

Unlike in case of physical shares, we could not find any clear judicial rulings which clarify the rights of the transferee during the interim period between execution of DIS by the transferor in favour of the transferee and the actual credit of shares to the demat account of the transferee.

• • However, the​​ legal position on​​ transfer​​ of​​ demat shares under the Depositories Act​​ would operate on similar lines as the​​ law relating to transfer of physical shares under the Companies Act for the following reasons:

• • • • Provisions of ToP Act would cover transfer of demat shares also: ​​ As discussed above, the Supreme Court had in Re: Vasudev (supra) had held that the provisions of ToP Act would apply to transfer of (physical) shares. ​​ The same position could therefore be extended to demat shares also, as they are also covered within the scope of the term “property” under ToP Act. ​​ In fact, Sec. 28 of the Depositories Act itself provides that the provisions of said law would be in addition to, and not in derogation of, any other law for the time being in force relating to the holding and transfer of securities. ​​ Therefore, as in Re: Vasudev (supra), it can be concluded that the provisions of the Depositories Act and the ToP Act must be read harmoniously with each other.

In fact, the decision of the Supreme Court in Re: Vasudev (supra) was relied on by the Supreme Court in a recent judgement​​ in​​ Re:​​ PTC India Financial Services​​ Limited v. Venkateswarlu Kari And Another​​ ¹²​​ to conclude that the provisions of the Contract Act and Depositories Act should likewise be interpreted harmoniously with each other.

• • • • Depositories Act only deals with registration of transfer:​​ Like the Companies Act, even the subject matter of the Depositories Act is not transfer of property in general. ​​ In fact, Sec.​​ 7​​ of the Depositories dealing with transfer of demat shares, mirrors the provisions of Sec.56 of the Companies Act, insofar as it deals only with “registration of transfer” and not transfer itself.¹³ ​​​​ Like Sec.56 of the Companies Act, the Depositories Act pre-supposes that transfer of shares has already taken place.

• • In​​ light of the above, in our opinion, the ratio of the Supreme Court in Re: Vasudev (supra) would apply to demat shares also. ​​ Accordingly, it can be concluded that:

• • • • Once a​​ transferor​​ executes a DIS in favour of the transferee, with the intent to transfer the shares to the transferee, the transfer of shares would be complete as between the transferee and the transferee.

This is subject to the condition that there is no obstacle in the Articles of Association of the company or otherwise which would prevent the transferee from registering itself as beneficial owner of the demat shares in the records of the transferee.

• • • • The transfer of demat shares would become complete and the transferee would become a shareholder in the true and full sense of the term with all the rights of a shareholder, only when the transfer of demat shares is registered in the register of beneficial owners maintained by the depository​​ and the transfer is in accordance with the Articles of the Company. ​​ 

Market Trades

• • In case of stock market trades, there is no DIS which is executed by the transferor. ​​ Rather, the execution of trades is carried out on the basis of instructions issued by the transferor, which are recorded in the contract note issued by the broker. ​​ The settlement of trades and the credit of securities into the demat account of the transferee occur on the settlement date.

• • The Income Tax Department has taken the view that the contract note, also known as the broker’s note, should be treated as the date of transfer and the period of holding is also to be reckoned from the “date of purchase” and not from the date on which the shares are actually credited to the demat account of the purchaser¹⁴.

• • This is in a sense logical and seems to follow the same line of reasoning as in case of physical shares, that​​ the​​ transfer​​ of shares​​ is complete once all necessary formalities have been completed by the transferor and one need not wait till registration of transfer by the depository or credit of shares into the demat account of the purchaser.

• CONCLUSION

Based on the above reasoning, summary of date on which transfer of physical and demat shares would be complete in accordance with law is tabulated as under: