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Allotment &
Transfer of Shares

M.Com., LL.M., M.Phil., Ph.D(Tax), FCS

Allotment of Shares (Sections 69 to 79A)

What you should know :

 7.1 Allotment of shares
 7.2 Underwriting and brokerage
 7.3 Purchase of its own shares by company / Buy back of shares.
 7.4 Issue of share at a premium / Discount
 7.5 Calls on shares
 7.6 Forfeiture
 7.7 Surrender of shares


a. What is allotment?
Allotment may be defined to mean the appropriation by the Board of Directors of the company out of the
previously unappropriated capital of the company of a certain number of shares to persons who have made
applications for shares. Allotment results in a binding contract ,since it amounts to acceptance of offer .
Prospectus  Invitation to offer
Application for shares  Offer
Acceptance of application  Allotment resulting in a binding contract
Allotment of shares gives a subscriber a right to demand shares and acquire shareholders rights. Re-issue of
forfeited shares does not constitute appropriation out of unappropriated capital and therefore does not amount to
An allotment to be valid
 should be made by proper authority, namely, the board of directors or a committee authorised by the Board.
 should be against application in writing,
 should not be in contravention of any other law and
 must be made within a reasonable time and
 must be communicated to the applicant.
 must be absolute and unconditional
b) Conditions to be complied with by a public company before allotment of shares
Statutory restrictions on allotment of shares: Sections 69 to 75 of the Companies Act, provides for a number of
statutory requirements with regard to allotment of shares: these are also sometimes termed as “restrictions on
1. Conditions to be complied with when a prospectus is issued -
No allotment of shares to the public can be made by a public company, which has issued a prospectus unless the
following conditions are satisfied:
i. Registration of prospectus: A copy of prospectus is duly filed with the Registrar of Companies (section 60)
ii. Application money: The amount received on application money is not less than 5% of the nominal amount
of the shares (section 69(3)). As per SEBI guidelines 25% of the nominal value of a share must be called
by way of application money except were issue size exceed Rs. 500 crores.
iii. Moneys to be kept deposited in separate bank account: section 69(4) Share application money collected
should be kept deposited in a separate account with bankers to issue.
(a) until the certificate to comment business has been obtained u/s 149,
(b) where such certificate has already been obtained, until the entire amount payable on application for shares
in respect of minimum subscription has been received by the company.
iv. Minimum subscription section 69(1): A company cannot allot the shares unless the minimum subscription
as specified in a prospectus has been subscribed and the application money on them has been received.
As per SEBI guidelines, a company making public issue of shares must receive a minimum of 90%
subscription against the entire issue before making an allotment of shares to the public.
As per section 69(5) minimum subscription is to be received before the expiry of 120 days after the first issue of the
prospectus. In case of failure, the entire amount is to be repaid within 130 days after the issue of prospectus. If the money
is not repaid within 130 days as aforesaid, the directors become liable to repay the same along with interest at the rate of
6 per cent per annum payable from the expiry of the 130th day.
However, as per SEBI guidelines in case of issue of shares by a company, if minimum subscription as stated in the
prospectus has not been received within 60 days of the closure of the issue, directors shall be personally liable to return
the money without interest, in case application money is repaid within 78 days of the closure of the issue and with interest
@15% per annum for the delayed period beyond 78 days.
v. Allotment can be made only from the beginning of the 5th day after the date of issue of prospectus section
72(1). Where shares are issued in terms of a prospectus issued generally, allotment cannot be made
before the beginning of the 5th day after the issue of prospectus. Prospectus is issued generally by issue
of a newspaper advertisement.
The subscription list for public should be kept open for atleast three working days and disclosed in the
vi. Listing of shares on one or more recognised stock exchange(s) (section 73): Allotment shall be void,
where permission for listing has not been applied, or if applied the same has not been granted by a stock
exchange or all the stock exchanges before the expiry of 10 weeks from the date of the closing of the
subscription list. Thus, if a single stock exchange refuses to grant permission, the entire allotment
becomes void, unless the refusal of the stock exchange is set aside on appeal.
The company shall repay the moneys received from the applicants, within 78 days from the closure of the
subscription list, without interest. If the money is not so repaid on the expiry of 78th day, the company and
every officer who is in default is liable to repay that money to the applicants with interest at the rate of 15 per
cent per annum.
vii. Basis of allotment and minimum no. of share holders: In case the issue is over subscribed, the applicant
will have to be allotted lesser no. of shares than applied for. In such a case allotment will be done pro-rata
in consultation with the stock exchange authorities and as per SEBI guidelines in this regard
As per the listing agreement of the stock exchange there shall be atleast 5 public shareholders for every 1
lakh of fresh issue of capital. This has been done as per the direction of SEBI.
viii. Resolution for allotment: The Board of Director shall then pass resolution regarding allotment of shares
and authorise the issue of letters of allotment and letter of regret.
ix. Refund of excess of application money: Section 73(2A) SEBI guidelines disallow retention of over
subscription under any circumstances. Accordingly, all monies in excess of the application money on
shares allotted must be repaid forthwith without interest. Section 73(2A) provides that if such money is not
repaid within 8 days from the day the company becomes liable to pay (i.e. 10 weeks), the company and
every director of the company, who is an officer in default, shall be jointly and severally liable to repay the
same with interest @ 15% p.a.
x. Issuance of share certificates: as per section 113, the company should deliver the share certificates within
3 months after the allotment of shares.
xi. Return of allotment: After allotment, the company must file with the Registrar a return of allotment within
30 days of the allotment of shares.
It may be noted that as per latest SEBI guidelines, a company shall not be allowed to make a fresh issue of its capital to the
public unless partly paid shares, if any, are made fully paid-up or are forfeited. [E.T., 13.8.1997]
2. Conditions to be complied with when prospectus is not issued -
Statement in lieu of prospectus: Where prospectus is not issued, a public company shall not allot any shares
unless it files a statement in lieu of prospectus with the Registrar atleast 3 days before the first allotment of
c. What is irregular allotment?
If an allotment of shares is made in contravention of the provisions of Secs. 69, 70 or 73 (discussed in the
previous pages), then the allotment is termed as irregular. Thus, an allotment will be considered irregular in the
following cases:
a. where minimum subscription has not been received;
b. where prospectus or a statement in lieu of prospectus has not been filed with the Registrar;
c. where subscription list is opened before the beginning of the 5th day from the date of the issue of prospectus;
d. where a minimum of 5 p.c. payable on application has not been received;
e. where the application money is not kept in a separate account with a scheduled bank; and
f. where stock exchange has either not listed shares within ten weeks or has refused permission.
d. Effect of irregular allotment
1. Allotment valid but punishment of fine: (section 60) Where the irregularity results in failure to deliver a copy of
the prospectus to the Registrar, the company and every person who is knowingly a party to the issue of the
prospectus shall be punishable with fine which may extend to Rs. 50,000.
2. Allotment voidable: (section 71(1)) If a company without complying with the provisions relating to: (i) minimum
subscription, or ii) application money, or iii) the filling of a statement in lieu of prospectus, make an allotment,
it, though irregular, is nonethelss an allotment. But an applicant may, if he so desires, avoid the allotment:
a) within 2 months of the statutory meeting where it was made before that meeting;
b) within 2 months of allotment, if it was made after the statutory meeting was required to be held.
It should be noted that an irregular allotment can be avoided only within the time limits indicated above, but
within the time limit it can be avoided even if the company goes into liquidation. The allottee must inform the
company within the time limits that he avoids the allotment.
3. Liability of Directors: (section 71(3)) In the event of non-compliance with the provisions of section 69 and
section 70, the allotment is rendered voidable at the option of the applicant. Besides, any director who has
knowledge of the fact of the irregularity shall be liable to compensate the company and the shareholder
respectively for any loss, damage or costs which the company or the allotee may have sustained or incurred
4. Fine In case allotment is made before the beginning of the 5 day: from the date of issue of the prospectus.
(section 72(3)) In such a case the company and every officer of the company shall be punishable with fine
which may extend to Rs. 50,000. However, the allotment will remain valid.
5. Failure to get listing-Allotment void: (section 73) In case of company’s failure to apply for listing of its share on
a stock exchange to list its shares or permission having not been granted before the expiry of ten weeks from
the date of closing of the subscription list, the allotment before void. Besides, the entire money received by
way of application money must be refunded forthwith. In case it is not repaid within 8 days of becoming due,
the company and every director who is an officer in default shall be jointly and severally liable to repay that
money with interest at the rate of 15% per annum.
Further, the company and every officer of the company who is in default shall be punishable with fine up to
RS. 50,000 and where the repayment is delayed beyond six months, also with imprisonment for a term up to
one year.
e) Return as to allotment
A return of allotment in the prescribed form is required to be filed with the Registrar of Companies within 30 days
of the allotment. In case of allotment of the shares against cash, the return must state the number and nominal
amount of the shares allotted; the names, address and occupation of the allottees; and the amount paid or
payable on each share.
Failure to file the return as aforesaid renders every officer of the company who is in default punishable.

7.2 Underwriting
Underwriting is in the nature of an insurance against the possibility of inadequate subscription. Underwriting is a
contract by which a person (known as underwriter) agrees that if the shares/debentures about to be offered for
subscription are not, within a specified time taken up by the public, he will himself take them up and pay for what
the public do not take up. A company may pay underwriting commission to any person in consideration of
his(a)subscribing to or agreeing to subscribe or (b) to procure subscription for shares/ debentures. Underwriting of
shares or debentures is not compulsory .
Conditions: Section 76 permits the payment of underwriting commission subject to the following conditions:
1. The payment of commission should be authorised by the Articles.
2. The names and addresses of the underwriters and the number of shares or debentures underwritten by each
of them should be disclosed in the prospectus.
3. The amount of commission should not exceed, in the case of shares, 5% of the price at which the shares
have been issued or the amount or rate authorised by the Articles whichever is less and in the case of
debentures it should not exceed 2.5%.
4. The rate should be disclosed in the prospectus, or in the statement in lieu of prospectus and should be filed
with the Registrar along with a copy of the underwriting contract before the payment of the commission.
5. The number of shares or debentures which persons have agreed to subscribe absolutely or conditionally for
commission should be disclosed in the manner aforesaid.
6. A copy of the contract for the payment of the commission should be delivered to the Registrar along with the
prospectus or the statement in lieu of prospectus for registration.
7. Section 76(4A) clarifies that commission to the underwriters is payable only in respect of these shares or
debentures which offered to the public for subscription

7.2a Brokerage
Brokerage is different from underwriting commission inasmuch as a broker does not undertake to subscribe for
shares in case the same are not subscribed by the public. Brokerage is essentially the reward paid to middle man
who brings about a bargain between the company and the purchaser of shares or debentures. the amount of
brokerage paid or payable should be disclosed in the prospectus or statement in lieu of prospectus. However,
brokerage can be paid only to professional brokers.

7.3 Purchase of its own shares by company

Section 77 prohibits a company limited by shares or a company limited by guarantee having a share capital from
buying its own shares. the section further disallows the public company and a private subsidiary of a public
company to give loan or provide financial assistance to any person to enable him to purchase or subscribe to
company’s own shares or shares of a holding company.
The aforesaid restrictions are however subject to certain exceptions which include:
 lending of money by a banking company in the ordinary course of its business;
 the lending of money or purchase of shares for the benefit of its employees;
 giving loans to employees to purchase fully paid shares of the company but not exceeding his six months’
salary or wages.
However, buy back of shares by the company can be done subject to the provisions of 77A and 77B.

7.3a Buy Back of Shares

Buy-back can be described as a procedure, which enables a company to go back to the holders of its shares and
offer to purchase from them the shares that they hold. (Sec. 77A)
Why buy-back? : There are three main reasons why a company opt for buy-back:
 To improve shareholder value, since buy-back provides a means for utilising the company’s surplus funds
which have unattractive alternative investment option and since a reduction in the capital base arising from
buy-back would generally result in higher earning per shares (E. P. S).
 As a defence mechanism, in an environment where the threat of corporate take-over has become real, buy-
back provides a safeguard against hostile take-overs by increasing promoters’ holdings.
 Management signalling The decision to buy-back articulates management’s’ view that the company’s future
prospects are good and hence investing in its own shares is the best option
Power of Company to purchase its own Shares (Securities) section 77A/ 77B
A company can buy back its own shares or securities subject to the provisions of sec. 77A , 77B and the buy back
rules and regulations. The buy-back by a listed company is to be made in accordance with SEBI (Buy-Back of
Securities) Regulations, 1998, and by an unlisted company in accordance with Private Limited Company and
Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999.
A. Pre- conditions for buy-back
1. The buy-back is permitted only if the articles of the company so authorise.
2. The buy-back of shares/securities is restricted to 25% of the total paid-up capital and free reserve. ( in any
financial year it cannot exceed 25% of the paid-up capital and free reserve)
3. Debt-Net worth ratio is not more than 2:1 after buy-back
4. Shares/Securities for buy-back are fully paid-up. The shares are not subject to any lock - in period.
B. Restrictions imposed for buy - back [section 77B ]
A company shall not buy-back its shares or other specified securities.
 through any subsidiary company, including its own subsidiary company.
 through any investment company or group of investment companies


 if default subsists in repayment of deposit or interest payable thereon, redemption of debentures or preference
shares, or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon
to any financial institution or bank
 if the company has not complied with the provisions of sections 159,207, and 211 i.e. when it has failed to file
the annual return with the Registrar, or failed to pay dividend within 42 days from the date of declaration, or
failed to prepare the balance sheet and profit and loss account as per requirements of Schedule VI
C. Sources of funds for buy-back [section 77A(1)]
Buy-back may be out-of
(I) its free reserves
(ii) the securities premium account
(iii) the proceeds of any shares/securities
Capital Redemption Reserves Account: If buy-back is out of free reserves a sum equal to nominal value of shares
so purchased shall be transferred to capital redemption reserves account Section 77AA
D. From whom can company purchase its shares [section 77A(5)]
The buy-back may be :
(a) from existing securities holders on a proportionate basis (tender method) or
(b) from open market (through stock exchange or book building process) or
(c) from holders of odd lots of shares or
(d) from employees pursuant to Employees Stock Option Scheme (ESOS) / Sweat Equity.
E. Procedure of buy-back of shares /securities
Before buy-back
1 The buy-back is authorised by its Articles.(Otherwise articles will have to be amended)
2 A special resolution is passed in Genera Meeting authorising the buy-back (within twelve months of special resolution
buy- back should be completed). According to the amendment in November 2001 where the buy-back is 10% or less of
the paid-up capital and free reserves of the company, a Board resolution authorising the buy-back is sufficient instead of
special resolution
3 The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory
statement stating –
a.) a full and complete disclosure of the all material facts;
b.) the necessity for the buy –back ;
c.) the class of security intended to be purchased under the buy-back
d.) the amount to be invested under the buy-back;
e.) the time limit for completion of buy -back
4 Declaration of solvency: Before making buy-back file with ROC, SEBI a declaration of solvency - that is capable of
meeting liabilities. The declaration of solvency need not be filed with SEBI in case of non- listed company.
5 Time limit for completion of buy back: Every buy back shall be completed within 12 months from the date of passing of
special resolution
After the buy-back
1 1 Verification and payment .The company shall after the closure of the offer, verify the offers received within 15 days of
such closure , and the shares so lodged by the members and make payment to the shareholders.
2. Extinguishment of securities. The company shall extinguish & physically destroy the securities so bought-back within 7
days of completion of buy-back.
3. Public adv. of completion of buy-back. The company shall, within two days of the completion of buyback issue a public
advertisement in a national daily regarding such buy-back Applicable to a listed company.
4. Return of buy-back. The company shall file of Return of buy-back with ROC, SEBI within 30 days of such completion
5. Register of buy-back. The company shall maintain register of buy-back mentioning the details of the securities bought
6. Cooling period. After completion of buyback there is a prohibition of new issue of shares within 6 months of buy-back
(except bonus, conversions)
7. Penalty for default : Non- compliance of the provisions relating to buy-back shall be punishable with 2 years
imprisonment or fine upto Rs. 50,000/- or both.
7.4 Issue of Shares at a Premium
The Companies Act is silent with regard to issue of shares at a premium except that section 78
enumerates the uses to which the securities premium amount can be put. Any amount of securities
premium collected by a company on issue of securities is required to be transferred to the
“Securities Premium Account “ This account should be used only for the following purposes:
 for issue of fully paid bonus shares;
 for writing off preliminary expenses,
 for writing off commission or discount allowed or expenses incurred on issue of shares or
 for payment of premium payable on redemption of preference shares or debentures.
Due to the free pricing of shares a company can charge any amount of premium subject to the guidelines of SEBI.
The SEBI guidelines lay down that existing private/ closely held and other unlimited companies which do not have
three-year track record of consistent profitability are disallowed to make their issues at premium. Besides, the
justification for the premium must be spelt out in the prospectus.

7.4a Issue of shares at a discount

Issue of shares at a discount is regulated by provisions contained in section 79. The conditions are:
 Only existing companies having commenced its business at least one year hence can make their issue at a discount.
 Only existing class of shares are allowed to be issued at a discount.
 The discount issue should be approved by general body meeting and the CL B accords its sanction.
 The maximum discount should not exceed 10% unless the Company Law Board permits a higher rate.
 Every prospectus must contain particulars of the discount allowed on the issue of the shares or so much of that discount
as has been written off at the date of the issue of prospectus. Any default in this requirement will render the company, and
every officer liable and punishable with fine extending to Rs.50.
Directors liability in respect of improper issue of shares at a discount : If the directors have improperly issued the
shares at a discount, the directors render themselves liable to compensate the company to the extent of the
amount of discount.

7.5 Calls on shares

A call may be defined as a demand by the company for payment of part of the issue price of shares or debentures
which has not been paid. The power to make calls is exercised by the Board in its meeting by means of a
resolution (section 292(1)(a)).
Requisite of valid call:
i) In accordance with the Articles. The call must be made in accordance with the provisions of the Articles of Association and
the Companies Act.
ii) Properly constituted Board Meeting: To be valid must be made by the directors duly appointed and duly qualified; against
a resolutions passed at the meeting of the Board of directors in which proper quorum must have been present.
iii) Uniform Basis: (section 91) It must be made on uniform basis and bonafide in the interest of the company.
iv) Notice of call: Notice of call must specify the exact amount and the time of payment. For each call atleast 14 days notice
must be given to members. An interval of 30 days is required between 2 calls and not more than 25% of the nominal value
of shares can be called up at a time. (Table A, Reg. 13). However, SEBI guidelines require entire amount to be called
along with application in case of issues upto Rs. 50 crores.
v) Payment of calls in advance: (section 92) Calls may be collected in advance and interest paid thereon as per the
provisions in the articles. Table A allows the payment of interest on calls in advance not beyond 6% per annum.
 Any company offering shares to the public must ensure that the shares issued are made fully paid-up within
12 months of the date of allotment, where the size of the issue is up to 500 crores.

7.6. Forfeiture of shares

A company’s articles usually contain a provision to forfeit shares of a member who fails to pay his calls due.
Forfeiture to be valid must fulfill the following conditions-
i) In accordance with the articles: The Articles of Association must empower the company to forfeit the
shares. As per Reg. 29 of ‘Table A’, shares can be forfeited only for non-payment of calls. The Articles of a
company may, however, lawfully incorporate any other grounds of forfeiture.
ii) Proper notice: Before the shares of a member are forfeited, a proper notice to that effect must have been
served. Regulation 30 of Table A provides that a notice requiring payment of the amount due together with
any interest accrued must be served mentioning a further day (not less than 14 days from the date of
service of the notice) on or before which the payment is to be made. The notice must also mention that in
the event of non-payment, the shares will be liable to be forfeited.
iii) Resolution for Forfeiture: If the defaulting shareholder does not pay the amount within the specified time
as required by the notice, the directors may pass a resolution forfeiting the shares (Article 31 of Table A)
iv) Power of forfeiture must be exercised bonafide and in good faith: The power to forfeit is in the nature of
the trust and must therefore be exercised bonafide and for the benefit of the company.
Effect of forfeiture
i) A forfeiture has the effect of termination of membership.
ii) However, a person whose shares have been forfeited continues to remain liable as a past member in
case liquidation takes place within one year forfeiture.
iii) Liability for unpaid calls remains even after forfeiture of shares.
Re-issue of forfeited shares
Normally, forfeited shares are re-issued. In case they are not re-issued it may amount to reduction of share capital
and therefore require the approval of the Court. The forfeited shares may be re-issued at par or premium or at a
discount. However, the discount on re-issue should not exceed the amount forfeited on those shares.
The Board of directors, may, on a request of a shareholder whose shares have been forfeited, cancel the

7.7 Surrender of shares

Surrender of shares means voluntary return of shares to the company for cancellation. There is no provision for
the surrender of shares either in the Companies Act or in Table A, but the Articles of some companies may allow it
as a short-cut to the long procedure of forfeiture. Surrender of shares shall be valid only -
a. When there is a provision to this effect in the Articles of Association of the company.
b. Surrender of shares is an alternative to forfeiture. Surrender of shares shall be valid only where their forfeiture
is otherwise justified. However, In any other circumstances, surrender of shares cannot be accepted without
sanction of the court since it would amount to reduction of capital.
Surrendered shares may be re-issued in the same way as forfeited shares.

Transfer of Shares (Sections 108 to 112)

What you should know?
 7.8 Right to transfer shares
 7.9 Procedure of transfer of shares
 7.10 When can company refuse transfer of shares
 7.11 Forged transfer and blank transfer
 7.12Transmission of shares
 7.13 Transfer of shares under the depositories system
 7.14 Nomination of shares
Transfer of shares means a change in the ownership of shares. One of the important features of a company is that
its shares are transferable. This provides liquidity to the investors and also contributes to a growing a capital
Shares of a company are freely transferable subject to the restrictions contained in the Companies Act, any other
statutes and the provisions of the Memorandum and Articles of Association of the company (section 82).
However, in case of private company, by its very definition, there has to be restrictions on the transfer of shares.
But in the case of a listed company / unlisted public company, after the enactment of Depositories Act, 1996, the
securities have become freely transferable. Even the Board of Directors cannot refuse transfer of shares on any
a. Prescribed share transfer form: Section 108 provides that transfer cannot be registered unless there is proper
instrument of transfer duly stamped and executed by transferor and transferee. The share transfer form
should be in form no. 7B and must be accompanied by the relevant share certificates. However in the case of
shares, which are transferred through a depository, neither the approval of the company would be necessary
nor the instrument of transfer will be required.
b. Stamping of presentation date: The instrument of transfer should be presented to the Registrar of Companies
or the prescribed authority before it is signed by the transferor and transferee who shall stamp or otherwise
endorse the instrument with the date on which it is presented.
c. Submission of transfer form: The instrument of transfer together with the related share certificate should be
submitted by the transferor or transferee to the company or the share transfer agent.
The duly filled transfer form should be submitted:
- in case of listed companies within 12 months of the presentation date or before the closure of register of
members, whichever is later,
- In any other case, within 2 months from the date of such presentation.
d. Verification and scrutiny of transfer form: The share transfer form will be checked and verified. The specimen
signature will be tallied. The guidelines of Stock Exchange and SEBI will have to be followed for scrutinizing
the share transfer form.
e. Intimation to transferee/ transferee: In the case of partly paid of shares, intimation should be sent to the
transferee especially when the transfer deed is submitted by the transferor. In case no objection is received
from the transferee within 2 weeks, the company may proceed to register the transfer. It is customary to send
intimation to the transferor if the documents are lodged by the transferee.
f. Board resolution: A board resolution should be passed for approving the transfer of shares and authorising
issue of share certificates to the transferees.
g. Endorsement and entry in register of members: At the back of the share certificate endorsement will be made
and the name of transferee will be entered in the register of members.
h. Delivery of share certificates to the transferee: The share certificates after endorsement will be delivered to
the transferee within 2 months of lodgement of transfer. In the case of listed company, share transfers should
be effected within 1 month of lodgement of transfer deeds.
The various steps involved in the transfer of shares is described below:
Obtain prescribed share transfer form (Form No. 7B) with the presentation date

Fill up the share transfer form

Get the deed signed by transferor and transferee, duly witnessed and attested

Attach the share certificate with the deed and affix share transfer stamps and cancel it

Deliver the deed and the certificate to the company with an application for transfer within the prescribed time

The company gives notice to the transferee in the case of partly paid up shares

The company board considers the application and orders for, or refuses, registration

If transfer is refused, the company notifies the transferor and the transferee, Returns the documents

When transfer is in order, the transferee is registered as member and the share certificate is sent to him after
endorsement of title
Certification of Transfer
U/s 108, transfer of shares shall not be registered unless the transfer deed is accompanied with share certificate.
However, sometime attaching the original certificate may not be possible e.g. in cases where the shareholder want
to sell only part of his holding or wishes to sell them to two or more persons. In such cases, the member can
submit original shares to the company. The company will make endorsement on the transfer form itself that the
original share certificate has been lodged with the company, specifying the number of shares. This is called
certification of transfer.
The Company will issue “balance ticket” for remaining shares. The person can sell the shares on the basis of
endorsement made by the company and get balance share certificates on submitting the “balance ticket”. (Since
the shares are issued in marketable lots and with the introduction of Depository system this system has become
A) In case of a public company listed or unlisted (Sec. 111A).
Shares of public company freely transferable. The Board of Directors of such company does not have any
discretion to refuse or withhold transfer of any security. The transfer has to be effected immediately and
automatically by the company/ depository.
 Appeal to CLB/NCLT An aggrieved transferee may seek remedy by filing an appeal before Company Law Board /
NCLT if the transfer is refused by the company within two months from the date of lodgement without sufficient cause.
 Rectification of register of members Section 111A, provides that rectification of register of members or record of
depository can be done by an order of Company Law Board / NCLT, on an application by an aggrieved depository,
company, investor or depository participant or SEBI if any transfer is made in contravention of any of the provisions of the
SEBI Act, 1992, Sick Industrial Companies Act, 1985 or any other law.
The application should be moved within two months of the transfer. After inquiry, if the CLB/NCLT is satisfied of the
contravention, it can direct the company/depository to rectify ownership records of securities. However, before completion
of enquiry, the CLB/NCLT can suspend voting rights in respect of securities so transferred.
B) In case of private company Sec. 111
Board resolution and notice of refusal. In case a private company refuses to register a transfer, it shall within two
months from the date of the lodgement of transfer, send notice of refusal to the transferee and the transferor,
giving REASONS for such refusal. A board resolution should be passed for refusing to transfer the shares.
Appeal Against Refusal To Register Transfer.
First Remedy - Appeal to CLB/NCLT. In case the company refuses to register a transfer, an appeal may be made
to the Company Law Board within two months of the receipt of notice of refusal and where no notice is received,
within four months from the date the instrument of transfer was delivered to the company.Sec.111(2),(3).
Second Remedy - Appeal for Rectification of register of members. [Sec. 111(4)].
a) the name of any person -
i) is, without sufficient cause, entered in the register of members of a company, or
ii) after having been entered in the register, is without sufficient cause omitted there from; or
b) default is made, or unnecessary delay takes place, in entering in the register the fact of any person having become, or
ceased to be, a member [including a refusal under sub-section (1)], the person aggrieved, or any member of the company,
or the company, may apply to the Company Law Board for rectification of the register.
The CLB/NCLT after such inquiry as it thinks fit either dismiss the petition or direct the registration of transfer. It is also
empowered to pass interim orders or grant injunction regarding dividend /bonus shares / right shares and award of costs.
Compliance with the order of CLB/NCLT – The order of CLB/NCLT to effect registration of transfer should be duly
complied with within 10 days of receipt of order.
Private companies are free to enforced the restrictions as may be contained in the Articles of Association against the right
to transfer their shares.


Forged transfer does not confer any title. Signature of the transferor is forged. The original owner of the shares continuous to
be the share holder.
Blank transfer
Where a share holder signs a share transfer form without filling in the name of the transferee and hands it over along with the
share certificate to the transferee thereby enabling him to deal with the shares, he is said to have made a “blank transfer”.
Ills of blank transfer - Loss of stamp duty
- Loss of Income-tax.
Restrictions on blank transfer - Sec. 108(1A), (1B)
a) Share transfer form to be presented to prescribed authority for stamping the date thereon.
b) The duly filled transfer form should be sent for transfer within 12 months of the presentation date or before the closure of
register of members, whichever is later, in case of listed shares. In any other case, within 2 months from the date of such


Transmission of shares may be referred to as the involuntary transfer of shares. It takes place in the event of
death or insolvency of a shareholder. A simple letter of request accompanied by proof of succession entitles the
legal representative for registration of the same in his name .No stamp duty is accordingly payable on
The following are the main points of difference between the transfer of shares and transmission of shares :
i) Nature of Act: Transfer of shares is the effect of deliberate voluntary act of the parties; while transmission of shares is the
result of operation of law on the happening of some relevant event such as the death of the shareholder, insolvency or
lunacy of a shareholder or purchase in a court sale.
ii) Consideration: There must be some consideration for the transfer of shares in all cases except where the shares are
transferred by way of gift, whereas the question of consideration does not arise in cases of transmission of shares.
iii) Instrument of transfer: A validly exempted instrument of transfer is required in the case of transfer of shares, but for the
purposes of transmission of shares , exemption of any instrument of transfer is not required and only a written request to
that effect is sufficient. However, an evidence showing the entitlement of the transferee (e.g., legal representative) may be
required by the company such as succession certificate etc.
iv) Stamp Duty: In case of transfer stamp duty is payable on the amount of the market value of shares ; while no stamp duty
is payable in case of transmission of shares.
v) Liability of the transferor: The liability of the transferor ceases as soon as the transfer is complete. Whereas shares
continue to be subject to all original liabilities and any dues on the shares may be enforced against the person to whom
the shares have been transmitted in his capacity as legal representative of the deceased shareholder no matter that he
did not get the shares registered in his name.

What is a Depository?
The system of depositories have revolutionized stock markets. The most single important development in the Indian Capital
Market in the last decade is the emergence of the Depositories System.
A depository is a company where securities of investors are held in electronic accounts. Just as the banks holds money, in the
same way a depository holds securities. A depository in India, must have a net worth of 100 crores and must obtain a
certificate of commencement of business from SEBI.
 Depository vs Bank A depository is similar to a bank. Just as you leave money in banks rather than holding it in cash,
you leave shares in the depository instead of holding them in physical form. As proof of you holdings, you get a statement
from the depository, just as you get a statement from a bank giving you the balance in your account. For withdrawing cash
from bank you issue a cheque. In the depository when you sell the shares you have to issue a debit instruction for delivery
of securities from your account. Similarly to receive securities into your account, you have to issue a credit instruction
similar to a pay -in-slip used for crediting money to your bank account. The depository, thus is to shares what a bank is to
Depository Bank C o n s t it u t e n t s o f t h e D e p o s it o r y S y s t e m
- Holds securities in Accounts - Holds
funds in Accounts
- Transfers securities between Accounts - Transfers D e p o s ito ry
funds between Accounts
- Transfers without handling securities - Transfers
without handling money P a r t ic ip a n t s ( D P ) Is s u e r ( C o m p a n y )
- Safe keeping of securities - Safe
Keeping of money B anks C u s to d ia n s
S h a r e H o ld e r s
Constituents : There are four constituents in the depositories
B ro k e rs N B F C
a) The depository
C le a rin g C o rp s . F in .In s ts .

In v e s t o r s
b) The depository participants
c) The beneficial owner
d) The issuer
a) The depository: The depository holds the securities of the investors in the form of electronic book entries (dematerialised
form). It maintains ownership records of securities and effects transfer ownership through book entry.
b) The depository participant: The depository cannot deal with millions of investors directly. It appoints agents called
depository participants who open and maintain accounts. It is similar to the branch of a bank. You can open account in any
branch of a bank.
A depository participant (DP) acts as an agent of a depository. A DP could be a public financial institution, bank, custodian,
broker, NBFC etc. having a net wroth of Rs. 1 crore. It is required to be registered with SEBI. An investor who wants to
avail the services of a depository must open an account with a depository participant. The investor has to enter into an
agreement with the DP after which he is issued a client ID number. The Stock Holding Corporation of India Ltd. was the
first depository participant registered with SEBI. The number of DPs operational till June 2002 was around 212 with 1649
service centers across the country.
c) Beneficial owner: By fiction of law, the depository is registered owner of the securities held with it with the limited purpose
of effecting transfer of ownership at the behest of the owner. The name of the depository appears in the records of the
issuer as registered owner of securities. The name of actual owner appears in the records of the depository as beneficial
owner. The beneficial owner has all the rights and liabilities associated with the securities. The owner of securities
intending to avail of depository services opens an account with a depository through a depository participant (DP). The
securities are transferred from one account to another through book entry only on the instructions of the beneficial owner.
d) The issuer: It is the company which issues the security.
 Models of depository : There are two models of depository – Immobilisation and dematerialisation. In the immobilization
model, physical scrips are held in the depository vaults, supporting the book entry records kept on the computer. It means
storage of scrips in the vaults of the depository so that the physical movement of scrips is frozen. In contrast, in
dematerialisation, there is no physical scrip in existence and the scrips are held in dematerialised form (electronic form).
India has adopted dematerialisation model of depository system.
Why Depository?
The depository system was introduced to eliminate the ills associated with paper based securities system such as delay in
transfer, bad delivery, theft, fake and forge shares etc. Before the introduction of the depository system the following problems
were faced by the investors and the companies :
- Forged and fake share certificates
- Bad deliveries
- Loss of certificates in transit
- Mutilation of certificates
- Delays in transfer
- Long settlement cycles
- Mismatch of signatures
- Delay in refund and remission of dividend interest etc.
Due to these problems large scale irregularities took place in the capital market and a securities scam broke in 1992.
Benefits of a depository :
- Eliminates bad deliveries. The problems of signature differences, deficiencies in the share transfer form associated with
the physical shares which causes bad delivery is eliminated.
- Improves liquidity : Immediate transfer of shares
- Low cost of public Issue
- No stamp duty in case of transfer within the depository.
- Eliminates the scope of theft, forgery etc. risks associated with physical form.
- Entitles the transferee to all rights immediately and settlement of transaction.
- Reduction in handling large volumes of paper
- Reduction in transaction cost
- Convenient method of consolidation of folios/accounts
- Holding investments in equity, debt instruments and Government securities in a single account
- Lower rate of interest for loan against pledged demat shares.
Key concepts of depository :
Depository facilitates paperless trading and electronic book entry transfer of securities. The following are its key concepts :
- Concept of FREE TRANSFERABILITY of shares.
- Concept of FUNGIBILITY of shares
Concept of FREE TRANSFERABILITY of Shares The system of depository requires the free transferability of shares. Since
there is immediate transfer of shares through computers one cannot wait for the Board of Directors approval for transfer of
shares ( which is the necessary condition in case of transfer of shares in the paper based transfer system). For implementing
the depository system the Companies Act was amended to provide for free transfer of shares in case of public companies.
Concept of FUNGIBILITY of shares: Shares are held in the depositories in electronic form(dematerialized form) These
shares are fungible i.e., all shares in electronic form are alike and same. This is in contrast to the paper form where the
shares are identified by certificate number or distinctive number. Under a depository, shares do not have distinctive numbers,
this means that shares, like currency are fungible meaning exchangeable for any other. The concept of fungibility permits book
entry transfer without attribution to specific scrips or distinctive numbers. All securities held in a depository are fungible
implies that all certificates of the same security are inter changeable and of same value having equal rights and privileges.
Share certificates shall become interchangeable. Investors will not get the same share certificates bearing same distinctive
numbers which they surrendered at the time of entry into depository
Concept of DEMAT or DEMATERIALISATION: is the process of transferring physical scrips into computerised ledger A/c
maintained by Depository. Demat securities are in fungible form i.e. they do not carry distinctive numbers.
Dematerialisation Process

1 In dematerialisation process, investor surrenders defaced certificates along with Dematerialisation Request Form to the
depository participant.
2 Depository participant intimates NSDL of the request through the system.
3 Depository participant submits the certificates to the registrar.
4 Registrar confirms the dematerialisation request from NSDL.
5 After dematerialising certificates, registrar updates accounts and informs NSDL of the completion of dematerialisation.
6 NSDL updates its accounts and informs the depository participant.
7 Depository participant updates its accounts and informs investor.
Concept of REMATERIALISATION: The conversion of dematerialised holdings back into certificates is called
rematerialisation. If the investor wishes to get back his securities in physical form, all he has to do is to request his depository
participant for rematerialisation of the same by filing up Rematerialisation Request Form. Depository Participant will then
forward the request to the depository after verifying that the investor has necessary balances. Depository, in turn will intimate
the registrar who will print the certificates and dispatch the same to the investor. The entire process of rematerialisation usually
takes a maximum of 30 days.
Facilities offered by Depository
There are two depositories operating in India. These are NSDL (National Securities Depository Limited) and CDSL (Central
Depository Services (India) Limited).
NSDL is the first depository in India. It was set up in 1996 by IDBI, UTI, NSE and SBI. By 2002 it had around 40 lakh client
accounts. The CDSL is the second depository set up by the Bombay Stock Exchange (BSE) and co-sponsored by the State
Bank of India, Bank of India, Bank of Baroda and HDFC Bank. BSE has a 45 per cent stake in CDSL while the banks have a
55 per cent stake. CDSL commenced operations on March 22, 1999.
Functions: The functions of depository include account opening, dematerialisation, rematerialisation, settlement and clearing,
pledge and hypothecation etc. Depository participant is the key player in the system who acts as an agent of the depository
and is in fact the customer interface of depository. It opens the accounts of the investors, facilities dematerialisation, settles
trades and effects corporate actions.
Depository also provides electronic credit in new issued wherein investor opens an account with the depository participant,
submits application with depository giving DP-Id and client-Id, the registrar uploads list of allottees to the depository and
depository credits allottee account with depository participant (DP). The refunds, if any, are sent by registrar as usual in any
public issue. The following facilities are offered by a depository:
• Dematerialisation i.e., converting physical certificates to electronic form;
• Rematerialisation i.e., conversion of securities in demat form into physical certificates;
• Facilitating repurchase/redemption of units of mutual funds;
• Electronic settlement of trades in stock exchanges connected to depository;
• Pledging/hypothecation of dematerialised
securities against loan; NSDL 2
(depository) Depository Participant
• Electronic credit of securities allotted in
public issued, rights
6 issue;
5 1
• Receipt of non-cash 3 corporate benefits such as bonus, in
electronic form;
• Freezing of demat 4 7 accounts, so that the
debits from the account are not permitted;
• Nomination facility for Registrar Investor demat accounts;
• Services related to change of address;
• Effecting transmission of securities;
• Instructions to your DP over Internet through SPEED-e facility.
• Account monitoring facility over Internet for clearing members through SPEED facility;
• Other facilities viz. Holding debt instruments in the same account, availing stock lending/borrowing facility etc.
Depository Process
How does an investor operate in the depository system? Just as in case of banks, he has to first open an account with a
depository through a depository participant (DP). For this purpose the investor has to enter into an agreement with the DP
after which he is given a client ID number. To convert his physical holdings into dematerialised form, the investor makes an
application to the DP in a dematerialisation request form (DRF). To convert his security from demat form into physical form he
has to make a rematerialisation request through rematerialisation request form (RRF). The investors have the option to hold
the securities in physical or dematerialised form or to rematerialize securities previously held in dematerialised form. But the
trading in the specified scrips can take place only in demat form, as the investors right is limited to holding of securities only.
The following diagram explains the structure of a depository.
How to trade in electronic shares?
Buying and selling shares in the electronic form is just like buying and selling physical shares, the only difference is trading in
securities in the electronic form is simpler and safer.
If investor wish to sell his shares, he places an order with his broker and instruct his depository participant by way of a delivery
instruction (which is a cheque like instrument) to debit his account with the number of shares sold by him.
When he buys shares he must inform his broker about his depository account number so that the shares bought by him are
credited into his account and instruct his participant by way of Receipt instruction to receive credit in his account.
Payment for electronic shares either bought or sold is made in the same way as in the case of physical securities. The shares
thus bought are transferred in the investors’ name the very next day of pay out. No formalities of filling transfer deeds, affixing
share transfer stamps and applying to the company for registering the shares in investor’s name are required to be observed
as in case of physical transfer of securities.
 Initial offer to be in demat form in certain cases (Section 68B) Section 68B provides that every listed
public company, making initial public offer of any security for a sum of rupees ten crores or more, shall issue
the same only in dematerialised from by complying with the requisite provisions of the Depositories Act, 1996
(22 of 1996) and the regulations made thereunder.
 Days to come: SEBI has notified certain scrips for compulsory demat trading by all investors. The details of some
forthcoming are given below :
- Securities to be mandatorily dealt in electronic form
- Public issue only in demat form
- Dividend distribution
- Securities lending and borrowing
- Increased participation by international investors.
- Faster settlement cycle – rolling settlement.


Earlier, there was no provision for making nomination by the holders of shares/ debentures/
deposits. In the event of death of a shareholder/ debenture holder/ deposit holder, the formalities of
transmission had to be completed by producing succession certificate, letter of probate, affidavit,
indemnity bond, etc. To simplify this time consuming process, sections109A, 109B introduced
nomination facility Provisions in respect of nomination are as follows:
1. For what can nomination be made?
Nomination can be made for: (i) shares (ii) debentures and (iii) fixed deposits
2. Who can make nominations?
Nomination can be made by-
i) Individuals only applying or holding shares or debentures on their own behalf, either singly or
jointly, and
ii) A minor can be nominated by a holder of shares or debentures or deposits and in that event the
name and address of the guardian should be given by the holder.
iii) A non-resident Indian can be nominated on repatriable basis
 The nomination, as aforesaid, will hold good against any legal successor (whether by will or
The nomination overrides any provision in respect of transmission by operation of law or by will.
Thus, if a person has been appointed as nominee, the shares will be transferred in his/ her name,
irrespective of any provision in will or succession certificate or probate [ section 109A(3)]
Nomination can be varied or cancelled in prescribed manner, but nomination prevails over any
provision of law of succession, will etc.
3. Who cannot be a nominee?
Facility of nomination is available only to individual’s i.e. natural persons (who can die). Nomination
by non-individuals like trust, society, body corporate, partnership firm, karta of HUF or a power of
attorney holder is not permissible.
Similarly, the following cannot be a nominee: (i) trust, (ii) society, (iii) body corporate, (iv)
partnership firm, (v) Karta of Hindu Undivided Family or (vi) a power-of-attorney holder.
4. How to make a nomination
An investor is required to file nomination in duplicate prescribed form no. 2B with company or
registrar and share transfer agents of the company who will return one copy thereof to the investor.
The form should be signed by two witnesses. If nominee is minor, name and address of guardian
shall be given by holder.
If shares/ debentures are held jointly, all joint holders must sign the nomination form. In case of joint
holding, the title passes to the nominee only if all joint holders die. [if one of the joint holder dies,
the shares are transferred in name of surviving joint holders]
5. Rights of nominee holder
i. The nominee is entitled to all rights of deceased member / debenture holder like dividend
and bonus. However, he will not be eligible for voting rights or other rights as a member,
unless he makes application in writing and is registered as a member in respect of the
shares / debentures.
ii. If nominee becomes entitled to any shares/ debentures by virtue of nomination, he will apply
to company along with proof of death of holder/ joint holders. He can either
a. request Board to register himself as the share holder/ debenture holder or
b. transfer the shares / debentures of deceased share/ debenture holder. [section 109B(1)].
Thus, the nominee can either register his name or directly transfer the debentures/ shares in
some other’s name.
If he elects to be registered holder of shares / debentures, he will have to send a written notice to
the company stating that he elects to be the registered holder. Such notice should be accompanied
by death certificate of share / debenture holder. [Section 109B(2)].
Default of the nominee The nominee must either register himself as member or transfer the
shares/ debentures is some other’s name. If he does neither, company can send him a notice to
elect either to become a member or transfer the shares/ debentures. if the nominee does not
comply within 90 days, Board can withhold payment of dividends, bonuses or other money payable,
till the requirement of notice is complied with – section 109A(4).
6. When does nomination stand rescinded?
Nomination will stand rescinded upon (i) transfer of share or (ii) transfer of debenture or (iii)
repayment of deposits or (iv) renewal of deposits.
7. Valid Discharge by company
Transfer of share or debenture in favour of a nominee and repayment of amount of deposits to
nominee shall be a valid discharge by a company against the legal heir.

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