Certain Limitations On The Transfer Of Shares In Private Companies That You Need To Know

Before initiating your own business, it becomes pertinent to choose the right business structure according to your business’s suitability and requirements. Entrepreneurs are offered choices to pick the best suitable business structure prior to carrying out the operations. 

Currently, many businesses are opting to register a private limited company as a business structure is predominant in the market as it offers multiple benefits to the business owners. The businesses built under this structure can opt for the funding from external sources while also limiting its liabilities which includes transferring shares as a means of ownership.

A private company can be explicated as a company through its articles as listed below.

– Limits the transfer of shares in an authorized manner.

– Proscribes invitation to the public to subscribe for its shares.

– Restricts its members to fifty (currently, it is up to 200).

– Proscribes deposit acceptance from the public other than the members.

That’s why a private company cannot infuse money from the general public with the issuance of debentures, shares and deposits, and deposits & shares in a private company cannot be transferred except with prior approval from the board of directors. Practically, the only transmission of deposits and shares in a private company (in case of insolvency or demise of the holder) is allowed.

Nonetheless, a private company might provide its shares to particular individuals with direct communication and acceptance. The number of its shareholders might rise from time to time and cross the limit of 200 members.

Nonetheless, only a few private companies have breached the limit of 200 members by 2 to 10 members, and many of them are family business companies only. As the company require not to declare and pay dividends even if there is a good amount of profit, private companies have tremendous reserves and surplus in their pockets in the form of gathered undistributed profits.

The limitations exasperate the purpose of investing in a private company business on the transfer of shares without the prior approval from the directors of the company, who have the management in their hands and unsatisfied shareholders can take the assistance from a court of law if they want to sell their share of holdings.

If the limitations on the transfer of shares in a private company are done away from the company law, and the manner of share transfer is processed via a unique separate stock exchange formulated for the purpose where all the private companies are obliged to be listed mandatorily, the businessmen will have the accessibility to the profitability and performance of the private companies as well, can provide to buy shares, pay taxes, earn dividend income, and true purpose of the private companies for the development of the MSME sector industries, merger, restructuring, demerger and so forth should be done.

To put it simply, the expulsion of limitations on the transfer of shares in private companies and processing of share transfer via a unique and separate stock exchange made for the purpose would even make private companies more competitive in comparison to public companies, promulgate investment in the private sector and a large amount of revenue of generating black money via running shell companies with limited capital, nominal business, high reserves will be dissolved.

Private companies must declare and pay the dividends from time to time, and it would set the benchmark for other large-scale public companies. The ROC might recognize those not performing in the alignment of benchmark, MCA, CBCE, SEBI, CBDT, CAG and other audit authorities, investigation and appraisal and resultant corrective action will be taken against them by such bodies. The purpose of former SICA for the revival of sick companies, releasing the choked capital, and so forth can also be executed for private companies with corporate status and compliance exemptions, leading to corrupt practices.

As a standard for good corporate governance, it is feasible for parties to draft a set of additional documents detailing the transfer of shares.

• Board Resolution or Take Note Transfer of shares

Pass Board resolution for authorizing and implementing the transfer of shares and documenting the same as in register of Transfer and other way is you can also take notice the same as in the committee meeting after the transfer of shares.

• Share Transfer Agreement

This is a share transfer document between the moving shareholder and the transferee where the shares are exchanged. Information about shares exchanged, mode of payment, etc. is all included in the same sector. A stamp sheet should be enclosed. The sum of stamp paper the Indian stamp act, 1899 stipulates.

• Sale Bill

This often involves the price at which transaction has been given or obtained. Both parties sign the very same document.

• Receipt

Receipt is a confirmation that a transfer has taken place, and that the consideration has been paid.