Transmission of Shares in India 

Transmission of shares in India refers to the process of transferring ownership of shares from a deceased shareholder to their legal heirs or nominees. This process is governed by various regulations and acts, including the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) guidelines.

Contributing Advisor

Neeraj Khatri

Manager, Business Advisory Services

Definition and importance

Transmission of shares refers to the legal process of transferring ownership of shares from a deceased or insolvent shareholder to their legal heirs or nominees. Unlike a voluntary sale or transfer of shares, transmission occurs due to an involuntary event such as death or bankruptcy. It is governed by Section 56 of the Companies Act, 2013, and relevant clauses in a company’s Articles of Association.

This process ensures the smooth and lawful transition of ownership, preventing any disputes or delays that could arise during the succession process. The legal heirs, or a nominee if one is specified, must provide proof of death or insolvency to initiate the transmission.

Why does your company need a Transmission of Shares?

Transmission of shares is crucial for maintaining clarity and continuity in company ownership. Upon the death or incapacitation of a shareholder, the company must register the new owner of the shares, ensuring that all legal rights and obligations associated with the shares are transferred appropriately. The legal representative or nominee is required to present necessary documents such as a death certificate, succession certificate, or letters of administration.

This process also helps prevent complications by confirming the rightful ownership of the shares. If the shares remain in the name of a deceased shareholder, legal heirs may face challenges accessing dividends or voting rights. By completing the transmission process, the company guarantees that the new owner can fully exercise their rights as a shareholder.

Transmission vs. Transfer of Shares

It is essential to distinguish between the transmission and transfer of shares. Transmission occurs by operation of law (due to death or insolvency), while a transfer is a voluntary action, where the shareholder actively sells or gives away their shares to another party. Both processes change the ownership of shares, but transmission is automatic following the proof of a legal event, while transfer requires mutual consent between the transferor and transferee.

Legal implications and penalties

The transmission of shares in India is governed by the Companies Act, 2013, specifically under Section 56. This section outlines the procedures and requirements for the transmission of shares, which occurs by operation of law, such as in the case of the death of a shareholder. Compliance with these regulations is crucial to ensure the legal transfer of ownership and to avoid penalties.

Penalties for non-compliance

Failure to comply with the provisions of sub-sections (1) to (5) of Section 56 of the Companies Act, 2013, can result in significant penalties for both the company and its officers. Specifically, if a company defaults in adhering to these provisions, it can be fined not less than ₹25,000 (US$298.8), which may extend up to ₹5,00,000 (US$5,976). Additionally, every officer of the company who is in default can be fined not less than ₹10,000 (US$120), which may extend up to ₹1,00,000 (US$1,195).

Types of shareholders

Resident shareholders

Resident shareholders are individuals who reside in India and hold shares in Indian companies. These shareholders are subject to Indian tax laws and regulations, which include the obligation to pay taxes on their global income.

Resident shareholders benefit from various rights and protections under Indian corporate law, such as voting rights, dividends, and the ability to participate in shareholder meetings. Their residency status ensures they are fully integrated into the Indian financial and regulatory system, making it easier for them to manage their investments and comply with local laws.

Non-resident shareholders

Non-resident shareholders, on the other hand, are individuals who do not reside in India but hold shares in Indian companies. These shareholders are typically subject to different tax treatments compared to resident shareholders.

For instance, non-resident shareholders are generally taxed only on the income they earn within India, such as dividends and capital gains from the sale of shares. The classification of non-resident status is determined by the amount of time spent outside India and other specific criteria set by Indian tax authorities.

Non-resident shareholders must navigate additional regulatory requirements, such as compliance with the Foreign Exchange Management Act (FEMA) and other relevant guidelines. They may also face restrictions on the repatriation of funds and other cross-border financial transactions. Despite these challenges, non-resident shareholders play a crucial role in the Indian economy by bringing in foreign investment and contributing to the growth of Indian companies.

Key differences and considerations

• Resident shareholders are taxed on their global income, while non-resident shareholders are taxed only on income earned within India.
• Non-resident shareholders must comply with additional regulations, such as FEMA, which governs foreign exchange transactions.
• Both resident and non-resident shareholders enjoy rights under Indian corporate law, but non-residents may face more complex legal and financial landscapes due to their non-resident status.

Specific requirements for different thresholds

Procedure for Transmission of Shares

Transmission with Nomination

Transmission of shares with nomination occurs when a shareholder has nominated an individual to receive their shares in the event of their death. This process ensures a smooth transfer of shares without the need for legal intervention, provided the necessary documentation is in place.

To facilitate the transmission of shares to the nominated individual, the following documents are typically required:

• Duly Signed Transmission Request Form: The nominee must submit a transmission request form, duly signed, to the company or its registrar.
• Original Death Certificate: The original death certificate of the deceased shareholder or a copy attested by a notary public or gazette officer.
• Self-Attested Copy of PAN Card: The nominee must provide a self-attested copy of their PAN card.
• Original Share Certificate: The original share certificate must be submitted to validate the ownership of the shares.

For instance, if a shareholder has nominated their child to receive their shares, the child can submit the above documents to the company’s registrar or the bank managing the shares. This process ensures that the shares are transferred seamlessly to the nominee without any legal disputes or delays.

In cases where the shares are valued up to ₹5 lakhs, No Objection Certificates (NOCs) from all legal heirs may be required, confirming their consent to the transmission. For shares exceeding ₹5 lakhs in value, additional legal documents such as a succession certificate, probate of will, or a letter of administration from the courts may be necessary.

• Probate of Will: This involves the legal validation of the deceased’s will, detailing how their assets should be distributed.
• Succession Certificate: Required when the deceased has not left a will, allowing the holder to manage the deceased’s financial affairs.
• Letter of Administration (LOA): Granted by a court to an administrator to manage the estate of a deceased person who did not leave a valid will.

By ensuring all required documents are in order, the transmission of shares can be completed efficiently, honoring the wishes of the deceased shareholder, and providing clarity and security to the nominee.

Transmission without Nomination

When a shareholder passes away without having nominated an individual to inherit their shares, the process of transmission becomes more complex. In such cases, the legal heirs of the deceased inherit the shares. This situation often arises when the shareholder dies intestate, meaning without a will. The legal heirs must follow a specific procedure to ensure the shares are transmitted correctly and legally.

To facilitate the transmission of shares without a nomination, the following documents are typically required:

• Duly Signed Transmission Request Form: The legal heir must submit a transmission request form, duly signed, to the company or its registrar.
• Original Death Certificate: The original death certificate of the deceased shareholder or a copy attested by a notary public or gazette officer.
• No Objection Certificate (NOC): A No Objection Certificate from all non-claimants, stating that they have relinquished their rights to the claim for transmission of securities.
• Notarized Indemnity Bond: A notarized indemnity bond from the legal heir(s) to whom the securities are to be transmitted.

In addition to the above documents, if the value of the shares exceeds ₹5 lakhs, further legal documentation may be required, such as:

• Succession Certificate: This certificate is necessary when the deceased has not left a will. It allows the holder to manage the deceased’s financial affairs, including the collection of debts and securities.
• Probate of Will: If there is a will, the probate process involves the legal validation of the will, ensuring its terms are conducted as intended.
• Letter of Administration (LOA): Granted by a court, this document allows an administrator to manage the estate of a deceased person who did not leave a valid will.

Transmission through Succession Certificate/Probate of Will

Transmission of shares through a succession certificate or probate of will is a legal process that ensures the rightful heirs inherit the shares of a deceased shareholder. This method is typically used when the shareholder has left a will or when a succession certificate is required to establish the legal heirship in the absence of a will. The process involves obtaining the necessary legal documents to prove the successor’s entitlement to the shares.

To facilitate the transmission of shares through a succession certificate or probate of will, the following documents are typically required:

• Succession Certificate or Probate of Will: This legal document establishes the right of the successor to inherit the shares. A succession certificate is issued by a court when the deceased has not left a will, while probate of will is a court-validated document confirming the authenticity of the deceased’s will.
• Original Share Certificate: The original share certificate must be submitted to validate the ownership of the shares.
• Certified Copy of Death Certificate: A certified copy of the death certificate of the deceased shareholder is required to confirm their passing.
• Specimen Signature of the Successor: The successor must provide their specimen signature to complete the transmission process.

For instance, if a shareholder has left a will naming their spouse as the beneficiary of their shares, the spouse can use the probate of will to prove their entitlement. They would need to submit the probate of will, the original share certificate, a certified copy of the death certificate, and their specimen signature to the company’s registrar or the bank managing the shares. This ensures that the shares are legally transferred to the spouse without any disputes.

Additional considerations

In cases where the shareholder has not left a will, the legal heirs must obtain a succession certificate from the court. This certificate allows the heirs to manage the deceased’s financial affairs, including the transmission of shares. The process of obtaining a succession certificate involves filing a petition in the court, which then verifies the legal heirship and issues the certificate.

Conclusion

The transmission of shares in India is a complex process governed by various regulations and acts. Understanding the different procedures and requirements is crucial for ensuring smooth and legal transfer of ownership. It is advisable to consult legal experts to determine the specific requirements for each case.