Companies Act Section 126

Companies Act Section 126 - Right to Dividend, Rights Shares, and Bonus Shares to be Held in Abeyance Pending Registration of Transfer of Shares

Section 126 of the Companies Act, 2013, deals with situations where shares of a company are undergoing a transfer process that is, when the company has received the instrument of transfer (the document used to transfer shares from one party to another), but the registration of the transfer has not yet been completed by the company.

During this interim period when the shares legally still belong to the original shareholder (the transferor), but they are in the process of being transferred to the new shareholder (the transferee) the company must hold certain rights and entitlements linked to these shares in abeyance. This ensures that no unfair advantage is given to either party, and that corporate entitlements like dividends, rights shares, and bonus shares are not wrongfully allocated while ownership is still legally unclear.

Key Provisions

When This Applies

This section applies only in cases where:

A valid instrument of transfer of shares has been delivered to the company for the purpose of registration.

The company has not yet registered the transfer in its records meaning, the shares are still officially in the name of the existing (original) shareholder.

Rights and Entitlements Affected

The company, despite any other provision of the Companies Act, 2013, must handle the following rights and benefits attached to such shares in a special manner:

(a) Dividend Entitlement During Transfer Pending Registration

For dividends declared in relation to such shares during the transfer period (before registration of the transferee), the company is required to:

Transfer the declared dividend to the Unpaid Dividend Account, as referred to in Section 124 of the Companies Act, 2013.

However, if the company receives a written authorization from the registered holder of the shares (the original shareholder still recorded in the register), the company may directly pay the dividend to the transferee (the intended new shareholder, as named in the instrument of transfer).

This provision ensures the company does not automatically pay dividends to the transferee until the transfer is fully registered, unless the registered shareholder expressly permits such payment.

(b) Rights Shares and Bonus Shares - Held in Abeyance

In respect of such shares under pending transfer, the company must keep in abeyance (meaning: temporarily withhold the rights and benefits) for:

Any offer of rights shares made under Section 62(1)(a), which refers to the pre-emptive right of existing shareholders to subscribe to additional shares when the company issues new capital.

Any issue of fully paid-up bonus shares under the first proviso to Section 123(5), which refers to the distribution of free shares to shareholders out of the company’s profits.

This means the company must pause and hold back these benefits until the transfer is either registered or otherwise resolved ensuring that neither the original shareholder nor the transferee receives unintended advantages or is unfairly deprived during the transfer process.

Rationale and Objective

This section balances the rights of the transferor and transferee while ensuring the company’s records remain legally sound. It prevents premature payments or allocations that could lead to disputes about entitlement if the transfer later falls through or if ownership is contested. By holding these rights in abeyance, the law:

Protects the interests of both parties (current shareholder and intended transferee).

Ensures the company acts impartially and avoids taking sides in an incomplete transfer.

Aligns with the principle of accurate and updated shareholder registers.