Companies Act Section 56

Companies Act Section 56: Transfer and Transmission of Securities under the Companies Act

1. Introduction  

The transfer and transmission of securities are essential aspects of managing ownership and control in companies. Section 56 of the Companies Act governs the processes by which securities (shares, debentures, or other instruments) are transferred from one party to another and outlines the requirements for registering such transfers. It also specifies rules for transmitting ownership rights in case of legal events, such as the death of a shareholder. This provision ensures that all transactions involving the transfer of securities are legally valid, transparent, and efficiently executed, protecting the interests of shareholders and the company alike.

2. Transfer of Securities (Subsection 1)  

The transfer of securities refers to the voluntary transfer of shares or other instruments from one individual or entity (the transferor) to another (the transferee). The Act establishes detailed guidelines to ensure that these transfers are properly documented and recorded.

Registration Requirement:  

A company cannot register the transfer of its securities or the interest of a member (for companies without share capital) unless:

1. The transfer is between individuals whose names are already recorded as beneficial owners in the records of a depository.

2. A proper instrument of transfer is submitted to the company, meeting the following conditions:

The instrument must be in the prescribed form.

It must be stamped, dated, and executed by or on behalf of both the transferor and transferee.

The document must specify the name, address, and occupation (if any) of the transferee.

3. The instrument of transfer must be submitted along with either:

The security certificate relating to the transferred securities.

A letter of allotment if no security certificate has been issued.

Time Limit for Submission:  

The transfer instrument must be submitted to the company within 60 days from the date of execution by either the transferor or transferee.

Lost or Delayed Instrument of Transfer:  

If the instrument of transfer is lost or not delivered within the stipulated period, the company may still register the transfer, provided:

The company is satisfied with the terms of indemnity determined by the Board of Directors.

3. Transmission of Securities (Subsection 2)  

Transmission of securities refers to the automatic transfer of ownership due to legal events, such as the death of a shareholder, insolvency, or succession. Unlike voluntary transfers, transmission occurs by operation of law.

Company’s Obligation to Register Transmission:  

A company is empowered to register the transmission of securities upon receiving intimation of such a transfer from the relevant legal representative or authorized person. This registration process ensures that the successor legally assumes the rights to the securities.

4. Special Provisions for Partly Paid Shares (Subsection 3)  

If the transfer of partly paid shares (shares on which only part of the nominal value has been paid) is initiated by the transferor alone, the transfer will not be registered unless:

1. Notice of the transfer is sent to the transferee by the company.

2. The transferee does not object to the transfer within two weeks of receiving the notice.

This provision ensures that the transferee is fully aware of and agrees to assume any outstanding liabilities related to the partly paid shares.

5. Timely Delivery of Security Certificates (Subsection 4)  

The company is required to deliver security certificates or intimate the depository about the allotment, transfer, or transmission of securities within the following timeframes:

Incorporation Subscribers:  

Security certificates must be delivered within two months from the date of incorporation to the subscribers of the company’s memorandum of association.

New Share Allotments:  

For any allotment of shares, certificates must be issued within two months from the date of allotment.

Transfer or Transmission of Securities:  

Where securities are transferred or transmitted, the relevant certificates must be delivered within one month from the date of receipt of the instrument of transfer or the intimation of transmission.

Allotment of Debentures:  

In the case of debentures, certificates must be issued within six months from the date of allotment.

Dealing with Depositories:  

If the securities are held in a dematerialized (demat) form through a depository, the company must immediately notify the depository of the allotment or transfer to ensure that records are updated promptly.

6. Transfer by Legal Representatives (Subsection 5)  

In the event of the death of a shareholder, the legal representative (executor or administrator) is entitled to transfer the securities held by the deceased, even if they were not originally registered as the holder of the securities. The transfer made by the legal representative will be considered valid as if the deceased shareholder had executed it.

7. Penalties for Non-Compliance (Subsection 6)  

If a company fails to comply with the provisions governing the transfer and transmission of securities, it will be subject to penalties:

Liability of the Company and Officers:  

The company and every officer responsible for the default will be liable to a penalty of INR 50,000 for each violation.

This penalty provision ensures accountability and motivates companies to comply with the timelines and procedures outlined in the Act.

8. Fraudulent Transfer of Securities (Subsection 7)  

The Act imposes strict liability on depositories and depository participants if they engage in fraudulent activities:

Liability for Fraud:  

If any depository or participant, with the intention to defraud, transfers shares or securities unlawfully, they will be held liable under Section 447 of the Companies Act, which deals with fraud.

This provision aims to safeguard the interests of shareholders by ensuring that depositories act in good faith and maintain accurate records of security holdings.