Comprehensive Write up on Sweat Equity, Transfer And Transmission of Shares

Individuals having ownership of shares are free by law to transfer their shares to any person of their preference. There are no unnecessary bars on share transfers bothering the shareholder or receivers. For instance, an employee owning a particular share in his company is allowed to transfer the share ownership to any third person of his/her preference.

As directed by Section 82 share ownership shall be treated as a movable/transferable property in adherence to the protocols of the company. Sessions are held in the court subjecting the restrictions/levy on transferring the share ownership the conclusion of which is that such share transactions might happen in line with the rules of the issuing companies but no article can completely ban or uselessly restrict the Transfer And Transmission of Shares ownership.

The ownership of shares is re-granted under the two different circumstances; either the shares are transferred or there is a Transmission of Share ownership from one individual to another. Both processes involve approval from the existing owner of shares.

Transfer of Share Ownership

The condition is when the share ownership is re-granted to another individual without any prior planning. Under such circumstances, the shares are simply given-out by the existing owner to the one he wishes to give out his shares. For instance, a shareholder in the company wishes to dispose of his shares. He can do so but in adherence to the terms and conditions of that issuing company.

Once the application process is complete and the documents are thoroughly verified, the shares will get registered under the name of the new share-owner.

Read Also: SEBI’s Latest Notifications Mandate Shares and Securities in Demat Form

The Procedure of Share Transfer

1. Documents of share transfer has to be duly executed by both parties.
2. Make sure to use the correct ‘Share Transfer Form’ (Form SH-4) for filing the request. The format of ‘Share Transfer Form’ is prescribed under Section 108 which is to be submitted to the Registrar of Companies (ROC).
3. The affixed documents must be duly stamped by the concerned authorities. Indian Stamp Act and Stamp Duty Notification in force in the concerned State
4. The complete set of documents including the personal identification documents like PAN of both the parties and physical share certificate of transferred shares needs to be submitted to the concerned authorities.
5. The signatures of the transferor and transferee should be checked thoroughly by the person giving his/her signature, name and address in the Share request form.

To Be Noted: Share Transfer method other than mentioned in legal share transfer provisions will be disqualified. The transferee gets share ownership only when the transfer is registered by the company.

1. Shares in Demat Mode – In case of fresh share offerings or IPO, the shareholder can opt for holding the shares in Demat mode or depositories. He can anytime change the shares into physical form by applying for a physical share certificate from the issuing company. Changes will be updated automatically in the depositories.
   The clauses of section 108 are not applicable for shareholders who are registered as beneficial owners in the depositories.
2. Deadlines For Issuing New Share Certificates – As mentioned under section 113, it is mandatory for the issuing firm to grant the physical share certificate of transferred shares within 2 months of application. Whether its approval or denial of application the result has to be disclosed on time by the issuing company.
   The delay in completing the needful will invite penalty for that particular firm.
3. Denying Share Transfer – The Board of Directors in the company have the power to refuse the transfer of shares. The step is valid on their part until it is for the benefit of the company. If the step is taken for any personal cause or corruptly, then the concerned individual has to face legal proceedings by the court.
4. Rights of Share Recipients – No matter the share transfer application is duly filed by the applicant until the transfer is registered by the issuing company, the transferor remains the rightful owner of the shares and the transferee is the beneficial owner of the shares. Mentioned under section 206A, until the transfer is not registered by the company the right to dividend, rights shares and bonus shares will be kept on hold.
5. Blank Transfer – Shareholder is allowed to sign the transfer form without mentioning the name of the transferee and hand it over to the person of his preference thereby letting the transferee deal with the shares. Such Transfers are known as Blank Transfers.
6. Shares Transfer Between Members of The Company – It is an unrestricted provision in the article that the employee in the company at first should offer the shares to one of his company colleagues. However, the article does not completely bar share transfer to outsiders.

Restrictions on Share Transfers

Furnishing false documents of share transfer, incomplete documents, disobedience of the law, stay order from a court or any other unscrupulous activity may lead to restrictions or denial of the share transfer request.

Other Than That:

1. Share transfer related to the company’s borrowing or
2. The bonus shares or any other shares allotted to the shareholders such as promoters or employees in the company and are non-transferable as per the orders of SEBI.

Transmission of Share Ownership

The transmission of shares signifies the situation when the shareholder dies, is bankrupt or is married. In such a condition the share ownership is automatically devolved to the legal representative or the next heir of the shares. The ownership of shares thus acquired by the representative can either be kept or be transferred to anyone on his/her wish.

Read Also: How to File Request for Transmission Of Shares Without Producing Probate / Succession Certificate / Letters Of Administration?

Difference Between Transmission And Transfer of Shares

1. Share transfer involves a complete process whereas share transmission is simply passing of shares from one person to another and requires no proceedings or formalities.
2. In case of share transfer, approval or denial is in the hands of the Board of Directors whereas under share transmission the devolution of shares cannot be refused on any grounds.

Sweat Equity Shares

Equity shares that are issued by the company to its directors or employees as bonuses, discounts, as appreciation for extending a good work or giving them a percentage in company profits or any other value additions are called Sweat Equity Shares. Difference Between Equity Share and Preference Share. Preference shares can be converted into equity shares but not vice versa.

Employees Can be

1. In-house salary based employee of the company
2. Director of the company
3. An employee or director described in sub-clause (a) or (b) of a company’s branch/holding firm in India or outside India.
4. Any compensation extended by the company to its employee as mentioned in the contract policies.
5. Against any monetary payment under any contract policies in case, the share achiever is a non-employee.

Process For Acquiring Sweat Equity Shares

1. Special Resolution – A special statement has to be passed by the members of the company authorizing the issue of sweat equity shares.
   The statement should be executed within a period of 12 months from the date of passing the special circular. If the execution is delayed then a fresh resolution has to be passed which will again be valid for the next 12 months.
2. Sweat Share Issue Limits – The company by law is restricted to issues sweat equity shares for more than 15% of the total paid-up equity shares or shares of value beyond Rs. 5 Cr. whichever is higher at that moment.
   The value of issued sweat equity shares should not go beyond 25% of the total paid equity capital of the company at any time.
3. Justified Pricing – The price of the company’s sweat equity shares shall not exceed the value determined by the registered valuer as to the fair price.

Read Also: Top 14 Differences Between Equity Shares and Preference Shares

Sweat Equity Shares (Registration)

It is mandatory for any company issuingzshares to maintain a record of shares issued in Form No. 4.3 and then furnish the complete details of shares issued under section 54.
The record needs to be processed and preserved in the registered office (mainly the head office) of the company. The records so generated need verification and signature either by the secretary of the Company or any other authorized individual.

Mentioned in The Board Report

The complete list of sweat equity shareholders needs to be reported in the ‘Board Report’ furnished to the concerned legal authorities once in a year.