Transfer and Transmission of Securities

Note the depository carve-out at the start. Where both parties hold in dematerialised form, no instrument is needed at all, because the depository's records do the work. That is why in practice the instrument survives mainly for unlisted companies.

The proviso saves a lost deed. Where the instrument of transfer has been lost, or has not been delivered within the prescribed period, the company may register the transfer on such terms as to indemnity as the Board may think fit.

Section 56(3): partly paid shares. Where the application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered unless the company gives notice of the application to the transferee in the prescribed manner, and the transferee gives no objection within two weeks of receiving the notice.

The reason is that a transferee of partly paid shares takes on a liability for the unpaid amount, so he must be given a chance to object before being fixed with it.

Transmission: section 56(2)

Nothing in sub-section (1) shall prejudice the power of the company to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.

That is the whole of transmission in the section, and its brevity is the point. No instrument, no stamp, no execution by two parties. An intimation from the person to whom the right has passed is enough, supported by whatever evidence the company reasonably requires, such as a succession certificate or a probate.

Section 56(5) completes it for a deceased holder:

The transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.

So a legal representative may transfer the deceased's shares directly to a buyer without first having himself registered as a member, and the transfer is good.

Delivery of certificates: section 56(4)

Every company shall, unless prohibited by any provision of law or any order of a Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted:

• (a) within two months from the date of incorporation, to subscribers to the memorandum;
• (b) within two months from the date of allotment, on any allotment of shares;
• (c) within one month from the date of receipt by the company of the instrument of transfer, or of the intimation of transmission, on a transfer or transmission;
• (d) within six months from the date of allotment, on any allotment of debentures.

The proviso: where the securities are dealt with in a depository, the company shall intimate the details of allotment to the depository immediately on allotment.

Four periods to learn: two months, two months, one month, six months.

Penalties: section 56(6) and (7)

Section 56(6). Where any default is made in complying with sub-sections (1) to (5), the company and every officer in default shall be liable to a penalty of fifty thousand rupees.

Section 56(7). Without prejudice to any liability under the Depositories Act 1996, where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable under section 447.

Refusal to register, and appeal: section 58

Section 58(1): private companies. If a private company limited by shares refuses, whether under a power in its articles or otherwise, to register a transfer or a transmission, it shall within thirty days from the date the instrument of transfer or the intimation of transmission was delivered, send notice of the refusal to the transferor and the transferee, or to the person giving intimation of the transmission, giving reasons for the refusal.

Two points. The power to refuse comes from the articles, which a private company must have under section 2(68). And the refusal must be reasoned and notified within thirty days.

Section 58(2): public companies. Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable.

The proviso is important and modern: any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. So free transferability does not prevent shareholders agreeing among themselves to restrictions such as pre-emption rights; those agreements bind the parties as contracts even though the company must still register a transfer made in breach.

Section 58(3): the transferee's appeal where notice is given. The transferee may appeal to the Tribunal against the refusal within thirty days from the receipt of the notice, or, where no notice has been sent by the company, within sixty days from the date on which the instrument of transfer or intimation of transmission was delivered.

Section 58(4): a public company's refusal. If a public company without sufficient cause refuses to register a transfer within thirty days of delivery, the transferee may appeal to the Tribunal within sixty days of such refusal, or, where no intimation has been received from the company, within ninety days of the delivery.

Four periods to keep apart: thirty and sixty for a private company under sub-section (3); sixty and ninety for a public company under sub-section (4).

Section 58(5): what the Tribunal may do. After hearing the parties it may dismiss the appeal, or by order direct that the transfer or transmission shall be registered, and the company shall comply within ten days of receipt of the order, or make such other order as the sub-section provides, including directing rectification and payment of damages.

Rectification of the register: section 59

Section 59 is the companion remedy. Where the name of a person is without sufficient cause entered in the register of members, or omitted from it, or where default is made or unnecessary delay takes place in entering the fact of any person having ceased to be a member, the person aggrieved, any member, or the company may appeal to the Tribunal, or in the case of a foreign member or debenture holder to a competent court outside India, for rectification of the register.

The Tribunal may dismiss the appeal or direct that the transfer or transmission be registered and the register rectified, and may direct the company to pay damages, if any, sustained by the aggrieved party.

Section 58 and section 59 answer different questions. Section 58 is about a refusal to register a particular transfer. Section 59 is about the register being wrong, whether by a wrong entry, an omission or a delay.

A worked example

Nanded Ceramics Private Limited has articles restricting transfer, as section 2(68) requires.

A transfer. Mr Jadhav agrees to sell two thousand fully paid shares to Ms Pinto. They execute a transfer deed, duly stamped and dated, specifying Ms Pinto's name, address and occupation, and deliver it to the company with the share certificate within sixty days of execution. Section 56(1) is satisfied.

A lost deed. Suppose the executed deed is lost in the post and more than sixty days pass. The proviso to section 56(1) allows the company to register the transfer on such terms as to indemnity as the Board thinks fit.

Partly paid shares. Suppose the shares were partly paid and only Mr Jadhav applied. Under section 56(3) the company must give notice to Ms Pinto and may not register unless she raises no objection within two weeks.

Refusal. The Board refuses to register the transfer under its articles. Under section 58(1) it must send notice of refusal, with reasons, to both Mr Jadhav and Ms Pinto within thirty days of delivery of the instrument. Ms Pinto may appeal to the Tribunal within thirty days of receiving that notice; had the company sent no notice at all, she would have sixty days from delivery of the instrument: section 58(3).

Now make the company public. Under section 58(2) the shares are freely transferable, and a refusal without sufficient cause within thirty days lets the transferee appeal within sixty days of the refusal, or within ninety days of delivery if the company said nothing: section 58(4). If the Tribunal directs registration, the company must comply within ten days of receiving the order.

A shareholders' agreement. The founders of the public company have agreed among themselves that none will sell without offering to the others first. Free transferability under section 58(2) does not destroy that promise: by the proviso, a contract or arrangement between two or more persons in respect of transfer of securities is enforceable as a contract between them.

A transmission. Mr Jadhav dies. His shares pass to his son by operation of law. No instrument of transfer is needed: the son sends an intimation of transmission with the evidence of his title, and the company registers it under section 56(2). Alternatively, Mr Jadhav's legal representative may transfer the shares directly to a purchaser without being registered himself, and by section 56(5) the transfer is as valid as if he had been the holder.

Certificates. On the transfer the company must deliver the certificate within one month of receiving the instrument; on an allotment, within two months; to subscribers to the memorandum, within two months of incorporation; and on an allotment of debentures, within six months: section 56(4). Default costs the company and every officer in default fifty thousand rupees: section 56(6).

The register is wrong. Two years later the company's register still shows Mr Jadhav as a member. That is not a refusal to register a transfer; it is an error. The remedy is section 59, rectification of the register, with power in the Tribunal to direct rectification and to award damages.

Distinctions that carry marks

What this does NOT mean

It does not mean an instrument is always needed. Section 56(1) excludes transfers between two persons both holding beneficial interest with a depository, and section 56(2) excludes transmission.

It does not mean a public company can never refuse. Section 58(4) speaks of refusal without sufficient cause, so a refusal with sufficient cause is possible; what a public company cannot do is impose a general restriction on transferability.

It does not mean a shareholders' agreement is void in a public company. The proviso to section 58(2) makes such a contract enforceable as a contract.

It does not mean section 58 and section 59 are alternatives for the same complaint. Section 58 attacks a refusal; section 59 corrects a wrong register.

Quick revision

• 56(1): proper instrument, stamped, dated, executed by both, with the transferee's name, address and occupation, delivered within sixty days of execution with the certificate or letter of allotment. Not required for a depository to depository transfer. Proviso: lost or late instrument, register on indemnity as the Board thinks fit.
• 56(2): transmission by operation of law on an intimation; no instrument.
• 56(3): partly paid shares, transferor alone: notice to the transferee, no objection within two weeks.
• 56(4): certificates in two months from incorporation for subscribers, two months from allotment, one month from the instrument or intimation, six months for debentures. Depository intimated immediately.
• 56(5): a legal representative may transfer a deceased member's shares though not himself a holder.
• 56(6): default, fifty thousand rupees on the company and every officer in default. 56(7): a depository or participant transferring with intent to defraud is liable under section 447.
• 58(1): a private company must give reasoned notice of refusal within thirty days. 58(2): a public company's securities are freely transferable, but a contract between persons about transfer is enforceable as a contract.
• 58(3): appeal thirty days from notice, sixty days from delivery if none. 58(4): public company, sixty days from refusal, ninety days from delivery if no intimation. 58(5): Tribunal may dismiss or direct registration, company to comply in ten days.
• 59: rectification of the register where a name is entered without sufficient cause or omitted, or there is default or unnecessary delay; the Tribunal may direct rectification and damages.

Test yourself

1. Distinguish transfer from transmission. Transfer is the voluntary act of a member passing his shares to another, and requires a proper instrument of transfer, stamped, dated and executed by both parties, delivered within sixty days of execution under section 56(1). Transmission is the passing of the right by operation of law, as on death or insolvency, and requires only an intimation under section 56(2).

2. Within what time must the instrument of transfer be delivered, and what if it is lost? Within sixty days from the date of execution. Where the instrument has been lost, or has not been delivered within the prescribed period, the company may register the transfer on such terms as to indemnity as the Board thinks fit: proviso to section 56(1).

3. What extra step is required for a transfer of partly paid shares applied for by the transferor alone? The company must give notice of the application to the transferee in the prescribed manner, and may not register the transfer unless the transferee gives no objection within two weeks of receiving the notice: section 56(3).

4. Within what periods must share certificates be delivered? Two months from incorporation for subscribers to the memorandum; two months from allotment on an allotment of shares; one month from receipt of the instrument of transfer or the intimation of transmission; and six months from allotment for debentures: section 56(4).

5. Are shares in a public company freely transferable? Yes. Section 58(2) provides that the securities or other interest of any member in a public company shall be freely transferable, but the proviso preserves the enforceability, as a contract, of any contract or arrangement between two or more persons in respect of the transfer of securities.

6. What is the remedy where a person's name is wrongly entered in or omitted from the register of members? An application under section 59 for rectification of the register, made by the person aggrieved, any member or the company, on which the Tribunal may direct rectification and may order the company to pay damages.