TRANSFER & TRANSMISSION OF SHARES – LAW & PRACTICE

Section 56 of the “”New Act” [Companies Act 2013], substitutes of old provisions pertaining to transfer and transmission of shares of a company. It is pertinent to note that Section 56 not only provides provisions for transfer of shares but also for the transfer of Interest in a Company which does not have a share capital.

 Though Section 44 of the Companies Act 2013, categorically placed “shares” as movable properties and are feely transferred, procedure involved in transfer and transmission of shares will not end in mere delivery of share certificates / instruments of transfer to the transferee.

Transfer of shares unlike transfer other movable properties involve the third party (Company) approval other than the transferor and the transferee. Also the definition section of Private Limited Company[1], places restrictions upon the transfer of shares held in a Private Limited Company.

Transfer of Shares – Law:

Section 56 of the Companies Act 2013, provides for the manner in which transfer of shares of a company be effected. Accordingly the procedure involved in transfer of shares of a company includes the following:

·         Production of Instrument of Transfer, in prescribed form (SH 4) either by the transferor or transferee. The instrument shall contain the name and particulars of the transferor and the transferee, along with the particulars of the share transferred.

·         Such instrument has to be duly executed and stamped as based on the value of shares that are transferred.

·          Share certificates / Letter of allotment of shares has to be delivered along with the instrument. In event of loss of instrument / the same has not been delivered within the prescribed period, the transfer may be effected on such terms as to indemnity as the Board may deem fit.

Transfer of Partly paid up shares:

In the words of Section 56(3), a transfer of partly paid up shares of a company shall be registered only upon issuance of notice to the Transferee and a no objection has to be obtained from him within two weeks from the issuance of the notice.

Delivery of share certificates:

Certificates of securities transferred or transmitted shall be delivered to the transferee within one month from the date of receipt of the instrument of transfer/transmission[2]. In case of securities dealt in a depository, then the details of such transfer shall be intimated to the depository immediately.

Refusal of Registration:

Shares of a public limited company are freely transferable. However, restrictions on transfer of shares shall be placed upon a Private Limited Company. In addition to the statutory provisions, transfer of securities of a private Limited Company are governed by the procedure prescribed in the Articles of Association of the Company.

The Board of Directors of a Company are vested with power to refuse the registration of transfer of shares of a Private Limited Company.[3]

Section 58 of the New Act provides the procedure on refusal of registration of shares. Accordingly, a Private Limited Company can refuse to register transfer/ transmission of shares by intimating the same within 30 days from the date of receipt of the instrument of transfer of intimation of the transmission. On refusal of registration of transfer, the Board is bound to provide reasons for such refusal.

Appeal by the Aggrieved Member:

Section 58(3) provides the mechanism for a member aggrieved by the act of the Company in refusing registration to redress the grievance. The transferor aggrieved by the refusal of transfer of shares or transmission as the case may be can file an appeal to the Tribunal within 30 days from the date of receipt of intimation refusing registration of transfer of shares. In case of no reply from the Board, then the member has a right to Appeal to the Tribunal within a period of 60 days from the date on which the instrument of transfer / transmission was delivered to the Company.

In case of transfer of shares of a public company, a member can appeal against the refusal of registration of shares within a period of 60 days from the date of receipt of refusal of transfer / transmission as the case may be. In case if there is no reply, then such appeal can be made within a period of 90 days from the date on which the instrument of transfer / transmission was delivered to the Company.

Court’s power to intervene:

The Tribunal after hearing both sides may either dismiss the Appeal or pass the following Order:

•       Direct the Company to register the transfer / transmission. Upon such Order the registration has to be made within 10 days from the date of the Order.
•     Direct rectification of Register.
•       Award damages to the aggrieved member, if any.

Any person contravening the Order of the Tribunal shall be punishable with an imprisonment of not less than 1 year but up to 3 years and a fine of not less than 1 lakh rupees but up to 5 lakhs rupees.

In Bajaj Auto Limited vs Company Law Board[4], the Supreme Court held that, if the power of the Board of Directors to refuse registration is not found in the interest of the Company, then the Court can interfere in the registration. The Board of Directors have a duty to act bonafide and in the interest of the Company and shareholders.

Judicial intervention is warranted when the refusal for transfer is based on irrelevant consideration. Refusal on frivolous ground was held void.[5]

Stamp Duty on Transfer of shares:

Stamp Duty for Shares are calculated on basis of consideration received on such transfer. A stamp duty of Rs 0.25 for every Rs 100 is chargeable as Stamp duty. In case of shares transferred without proper consideration ( Gift of shares), then the market value of shares are required to be considered for calculation of Stamp duty.

It is pertinent to note that Section 8A of the Indian Stamp Act exempts payment of Stamp Duty for securities issued in electronic form  provided the consolidated stamp duty is already paid. Also shares transferred between a Depository and the beneficial owner will not attract Stamp duty.

Liability to Pay Stamp duty:

According to the provisions of Section 29 of the Stamp Act, unless there is an agreement to the contrary,the expenses relating to the Stamp Duty are to be borne by the person executing the document. In the case of transfer of shares of a company it is the seller who is responsible for payment of stamp duty. [6]

The transferee is not liable for stamp duty on a mere fact that instrument for transfer of shares is required to be executed both by the transferor and transferee.[7] Section 17 of the Stamp Act makes it clear that any instrument chargeable with duty, should be stamped before the instrument is signed. However in practice this may also be borne by the transferee.

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[1] Section 2 (68) of the Companies Act 2013

[2] Section 56(4)(c)

[3] Section 58(2) of the Companies Act 2013.

[4] AIR 1999 SC 345

[5] Techno electric & Engg company Limited Vs Payal Singh, (1992) 1 Comp. L.J 334 (Cal)

[6]  Union of India vs. Kulu Valley Transport Ltd. (1958) 28 Comp. cas. 29

[7] Mrs. G.R. Parry vs. Union of India (1962) Comp. cas. 145

Independent Directors & Comapnies Act - An Analysis

The Concept of “Independent Directors” though not mandated by the Companies Act 1956,is not new to the Corporate scenario. Before the enactment of Companies Act 2013, the Clause 49 of the listing agreement contained the code of appointment of independent directors to the Board of listed companies.

The concept of Independent Director has now become a mandatory requirement under the Companies Act 2013.

Scope of Section 149 :

Section 149 of the Companies Act 2013 deals with provisions relating to the Appointment of Board of Directors. Sub sections (6) to (13) of the Section 149 provides for the qualification, term, liability, code of conduct and other aspects relating to the Independent Director.

Rule 4 of The Companies Appointment and Qualification of Directors) Rules, 2014[1]:

The following class or classes of companies shall have at least two directors as independent directors

  (i) the Public Companies having paid up share capital of ten crore rupees or more; or

  (ii) the Public Companies having turnover of one hundred crore rupees or more; or

 (iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it:

 Qualifications of an ‘I.D’:

According to Section 149(6), the following persons (other than a Managing Director or Whole Time Director of a Company) are eligible to be appointed as independent directors of a Company:

a)      A person who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience

b)      A person who is or was not a promoter of the company or its holding, subsidiary or associate company;

c)      A person who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

d)     A person who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

e)      A person none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

f)       A person who, neither himself nor any of his relatives--

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of--

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non profit organisation that receives twenty-five per cent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the company; or

g)      A person who possesses such other qualifications as may be prescribed.

The Ministry of Corporate Affairs has clarified that, the term “Pecuniery Relationship” does not include transactions at “Arms length” price and they are excluded from Section 149 (6) [2]

Declaration by the Independent Director:

According to Section 149 (7),  Every I.D,

·         At the first Board meeting after his appointment, and

·         First Board meeting in every financial year or

·          whenever there is any change in the circumstances which may affect his status as an independent director

Shall give a declaration that he meets the criteria of independence as provided in sub-section (6) of Section 149.

Term of office:

·         As per the provisons of Section 149 (10) an I.D shall hold office for a term up to five consecutive years on the Board of a company.

·         An I.D is eligible for re-appointment on passing of a special resolution by the shareholders. Such appointment shall be disclosed in the Board's report.

·         According to Section 149 (11), No I.D,  shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director. [ Provided during the said period of three years, he shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.]

·         The provisions of sub-sections (6) and (7) of section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of I.D’s. – Section 149 (13)

Liabillity :

The 2013 Act , while providing provisions relating to the I.D’s have also provided a shield to safeguard such directors from liability. Section 149 (12) draws a line of demarcation between acts committed within and outside the knowledge and consent of the I.D’s in determining the liability of the I.D’s. Accordingly an I.D is liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. Though the wordings of the section with regard to the determination of liability of the I.D is vague and broad, the burden of proof is on the person who is desirous of imposing the liability on the I.D.

Other Provisions:

·         Subsection 8 of Section 149 connects with Schedule IV which provides for a comprehensive code of conduct with respect to the I.D.

·          Subject to the provisions of sections 197 and 198, an I.D shall not be entitled to any stock option. However he may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.[3]

Highlights of Schedule IV of the Act:

1.      The Code provides for guidelines for professional conduct of the I.D, which entrust fiduciary responsibility upon those directors to exercise their powers and duties in a bonafide and diligent manner.

2.      The Code enunciates the roles and functions of the I.D, where the I.Ds are required to take up different roles as a moderator, scrutiniser, a mediator etc ensuring effective functioning of the Board proceedings and safeguard the stakeholders interest.

3.      The Code lists the duties of the I.Ds right from periodical attendance and reporting of the Board Proceedings to acting as a Check point in preventing as to be filled any unfair practices etc happening in the Board and in the Company.

4.      The Code provides for the manner of appointment, removal and resignation of the IDs where in event of appointment, a letter of appointment containing various provisions relating to his appointment is mandatory[4]. In event of resignation / removal his place has to be filled up within 180 days from such resignation / removal. The MCA has clarified that, appointment of I.Ds who appointed before the commencement of this Act will not be considered for the purpose of calculating their tenure and fresh appointment has to be made under Section 149 (10) & (11) read with Schedule IV.[5]

5.       The code madates the meeting of the I.Ds without the presence of other directors of the Company atleast once in a year to review the activities of the Board throughout the year.

6.      The performance evaluation of the I.D shall be done by the Board excluding the director being evaluated and based on the report of such evaluation, the continuation of the I.D in the Company shall be determined.

In conclusion, it is very understood that the object behind the concept of Independent Directors as mandated by the legislation, is highly relevant for fair and ethical corporate governance, protection of Minority stakeholders’ interest and also it acts as a check point in conduct of affairs of the Board.

As pointed out in JJ Irani Committee Report, “The concept of Independence is not to be viewed merely as independence from promoters interest but from the point of view of the vulnerable stakeholders who cannot otherwise get their voice heard  ”, the new law has taken into consideration so many checkpoints before drafting the provisions relating to I.D’s.

However the question that whenever the compliance of this law is both in letter as well as in spirit has to be answered only over a period of time. Also the fact that the executive and wholetime directors’ fear of losing their confidentiality in entry of an external director who overlooks their proceedings cannot be ignored in a short period of time. To fill up the requirements, it needs as many independent directors as possible.

Also the fear of the Companies in finding a person of Expereince and expertise in the field is also to be noted here, as

Further the challenge lies in the hands of the I.D’s who are appointed with slightly over mounted responsibilities and when they overcome the same and contribute to the clean corporate governance.

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[1] As amended upto November 2014

[2] MCA Circular No. 14 of 2014 dated 9th June 2015

[3] MCA Circular No. 14 of 2014 dated 9th June 2015

[4] MCA Circular No. 14 of 2014 dated 9th June 2015

[5] MCA Circular No. 14 of 2014 dated 9th June 2015

Law Relating to Debt Recovery - I

Law relating to debt recovery has gained more significance in the recent past.  When lenders were not able to recover the dues from its borrowers, they found lot of difficulties in take recourse from complicated litigations piled up before the Civil Court.

In order to ensure speedy recovery of debts due to these banks and financial institutions, the specific enactment called the Recovery of debts Due to banks and financial institutions Act, 1993 (Debt Recovery Act) was passed.

ESTABLISHMENT OF DRT AND DRAT:

The act provides for establishment of special Tribunals called “Debt Recovery Tribunals” (DRT) and the “Debt Recovery Appellate Tribunals”(DRAT) exclusively for the speedy disposal of complaints under this enactment.

Debt Recovery Tribunals are established all over the country based on the volume of cases registered in a particular state. For instance a state may have more than one DRTs and on the other hand two states may have a same DRT. In India there are totally 33 Debt Recovery Tribunals and 6 Debt Recovery Appellate Tribunals.

COMPOSITION OF DRTS AND DRATS:

Every Debt Recovery Tribunal shall have a presiding officer who is or is qualified to be a Dirstrict Judge. The Presiding officer shall have such other officers as he may require for his assistance. Also the Presiding officer shall appoint Recovery officers who will discharge their duties assigned to them under this Act.

Similarly every Debt Recovery Appellate Tribunal Appellate shall have a Chairperson who is or is   qualified to be a Judge of High court. The Chairperson shall have such other officers as he may require for his assistance.

JURISDICTION AND LIMITATION:

Section 17 of the Act confers Jurisdiction on the DRTs and DRATs to entertain cases filed by the banks and the financial institutions. Further Section 18 of the Act Bars Jurisdiction of other Courts in hearing matters falling under Section 17 (except the Supreme Court, and a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution)  

According to section 24, the provisions of the Limitation Act, 1963, (36 of l963) shall, as far as may be, apply to an application made to a Tribunal.

PROCEDURE:

Section 19 of the Act provides for the procedure pertaining to the Tribunals. Section 19 of the Act provides the following stages with respect to the proceedings before the Tribunal:

a)      Filing of Application before DRT - Bank / Financial Institution has to make an Application in prescribed form along with prescribed fee (based on the claim amount) to the Tribunal having competent Jurisdiction.

b)      Two or more banks against one Borrower : When a Bank / Financial Institution files an Application against a same person against whom an Application has already been filed by another bank, then the later bank may join the Applicant bank at any stage of the proceedings before the final order is passed.

c)      Issue of Summons : Summons will be issued upon filing of the Application requiring the Defendants to show cause within 30 days , as to why such prayers shall not be granted against the Defendants

d)     Filing of Written Statement : The Defendants inturn will have to file a Written Statement within the time prescribed by the Tribunal

e)      Set off : When the Defendant claims to set off any sum legally recoverable by him from the Applicant, against the Applicant’s claim, then the Defendant may file a Written statement containing particulars of set off. Such particulars of Set off cannot be filed after Written Statement. Such Written statement shall have the same effect as a plaint in a cross suit so as to enable the Tribunal to pass Orders in respect of both the claims.

f)       Counter Claim: The Defendant in addition to his right of pleading set off, may set Counter Claim against the Claim of the Applicant, any right or a claim of a cause of action accruing either before or after filing of the Application but not after filing of the Defence by the Defendant. Such Written statement shall have the same effect as a plaint in a cross suit so as to enable the Tribunal to pass Orders in respect of both the claims. The Applicant may file a Written statement to the Counter Claim within the time stipulated by the Tribunal

g)      Attachment of the property : At any stage of the proceeding, the Tribunal may Order for attachment of the whole or such portion of the properties claimed by the applicant as the properties secured in his favor or otherwise owned by the borrower to the extent that satisfies the recovery of debt, if the Tribunal is satisfied that the Defendant with intent to obstruct or delay or frustrate the execution of any order for the recovery of debt that may be passed against him, is about to dispose of, remove the property from the Jurisdiction of the tribunal or if he is likely to cause any damage or mischief to the property or affect its value by misuse or creating third party interest. The Defendant will be given an opurtunity of being heard before passing any such Order.

h)      Orders passed by the Tribunal :

a) Appointment of a receiver

(b) remove any person from the possession or custody of the property;

(c) commit the same to the possession, custody or management of the receiver;

(d) confer upon the receiver all such powers, as to bringing and defending suits in the courts or filing and defending applications before the Tribunal and for the realization, management, protection, preservation and improvement of the property, the collection of the rents and profits thereof, the application and disposal of such rents and profits, and the execution of documents as the owner himself has, or such of those powers as the Tribunal thinks fit; and

(e) appoint a Commissioner for preparation of an inventory of the properties of the defendant or for the sale thereof.

APPEAL:

Any person aggrieved by the Order of the Tribunal may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter, in such form and manner as may be prescribed. Such Appeal has to be filed within forty-five days from the date on which a copy of the order made, or deemed to have been made, by the Tribunal is received by him

The Tribunal may entertain an appeal after the expiry of the said period of forty five days if it is satisfied that there was sufficient cause for not filing it, within that period. No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of the parties.

The Appellate Tribunal may, after hearing the parties, pass such orders confirming, modifying or setting aside the order appealed against.

It is pertinent to note that, the Act prescribes time limit of 6 months for the Appellate Tribunal and it shall try and dispose of the Appeal within such time.

Section 21 of the Act mandates that an Appeal under Section 20 shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal seventy-five per cent of the amount of debt so due from him as determined by the Tribunal under section 19.

Provided that the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited under this section.

MODE OF RECOVERY OF DEBTS:

The Recovery officer shall proceed to recover the amount of debt specified in the certificate of recovery by one or more of the following modes, namely,- 

(a) Attachment and sale of the movable or immovable property of the defendant; 

(b) Arrest of the defendant and his detention in prison; 

(c) Appointing a receiver for the management of the movable or immovable properties of the defendant.