Allotment & Transfer of Securities

What are allotment and transfer of securities?

An allotment is the company issuing new shares — to an investor, to its existing shareholders, or to employees under an ESOP. It brings money into the company or rewards people, and it changes the cap table. A transfer is an existing shareholder passing their shares to someone else, without the company issuing anything new.

Both are governed by the Companies Act, 2013, and by FEMA whenever a non-resident is involved. Each type of allotment has its own approvals, pricing rules, and deadlines, and getting them wrong is expensive to unwind.

The key concepts

A handful of terms come up in almost every allotment or transfer:

Authorised capital

The ceiling on how much share capital the company can issue, set in its MoA. If an allotment would cross it, the ceiling is raised first by shareholder resolution and Form SH-7.

Allotment

The company issuing new shares, which brings in money or rewards people and changes the cap table. It's done by board resolution, with shareholder approval where the Act requires it.

Transfer

An existing shareholder selling or gifting their shares to someone else. The company's capital doesn't change — only who holds it.

Valuation

Shares issued on a preferential basis need a valuation report from a registered valuer. Issues to or transfers with foreign investors also have to respect FEMA's fair-value pricing rules.

PAS-3 (return of allotment)

Filed with the ROC after every allotment — within 15 days for a private placement, and 30 days for other allotments.

Share certificates and demat

Certificates are issued within two months of allotment. Private companies other than small companies now have to issue and transfer shares in demat form only.

FEMA reporting

Shares issued to a non-resident are reported in Form FC-GPR within 30 days, and transfers between residents and non-residents in Form FC-TRS within 60 days.

Why doing it properly matters

Share issues and transfers are where small procedural slips turn into large problems, usually at the worst time — in the middle of a funding round:

A clean cap table

Every investor, acquirer, and auditor reconstructs the cap table from allotment and transfer records. Gaps have to be regularised before a deal can close.

Private placement rules are strict

Money raised without following the private placement process can attract a penalty up to the amount raised, and has to be refunded.

Refund deadlines on subscription money

If shares aren't allotted within 60 days of receiving the money, it must be refunded, with interest if the refund is also late.

Tax on under-priced transfers

A transfer of unlisted shares below their fair market value can be taxed in the buyer's hands, and the seller's gain computed on fair value regardless of the price.

Foreign investment compliance

Late or missing FC-GPR and FC-TRS reports can lead to penalties under FEMA and complicate the next foreign round.

ESOPs that actually work

An ESOP scheme not approved and documented properly may not be enforceable — a real risk for employees relying on it.

Proof of ownership

The register of members is the legal record of who owns the company. It's what settles disputes between founders or with investors.

Who needs this?

• Startups raising seed or angel funding through a preferential allotment
• Companies bringing existing shareholders' money in through a rights issue
• Companies setting up an ESOP pool, or allotting shares when employees exercise options
• Companies capitalising reserves through a bonus issue
• Shareholders selling or gifting shares — founders exiting, co-founders rebalancing, or investors selling to others
• Companies taking investment from, or transferring shares to, a non-resident investor

It's best to involve us before the money moves or the agreement is signed. Most of the expensive problems — money received before approvals, or a price below fair value — can't be fixed after the fact.

Four ways to issue new shares

Which route you use depends on who's getting the shares and why. Here's how they compare for a private company:

What we'll need from you

Current cap table

Who holds what today, with the register of members and any earlier allotment or transfer records.

Deal terms

The term sheet or agreement: who's investing, how much, at what price, and any rights attached to the shares.

Allottee or transferee details

PAN, address, and KYC for each person receiving shares, and residency status, since non-residents trigger FEMA rules.

Financial statements

Latest audited accounts and projections, which the valuer needs for the valuation report.

Articles of association

The articles, since they can restrict transfers, give pre-emption rights, or need amending for investor rights.

Demat details

The company's ISIN and each allottee's or transferee's demat account, if the company's shares are in demat form.

Stamp duty is payable on share certificates issued on allotment and on transfers, and ROC fees apply to PAS-3 and to any increase in authorised capital. We'll confirm the exact amounts for your issue.

Allotment process

For a preferential allotment to an investor — the most common case for a startup — the steps run like this:

1. 1

   Check capital and articles

   We confirm authorised capital is enough, raising it if needed, and that the articles permit the issue and any rights promised to investors.

2. 2

   Valuation

   For a preferential allotment, or any issue to a non-resident, a valuation report is obtained to support the issue price.

3. 3

   Board and shareholder approvals

   The board approves the issue and calls a general meeting where a special resolution is needed. The resolution is filed in MGT-14.

4. 4

   Offer and receipt of money

   The offer letter goes out, and subscription money is received from the allottee's own bank account — into a separate account for a private placement.

5. 5

   Allotment

   The board allots the shares within the time limit, updates the register of members, and credits demat accounts or issues certificates.

6. 6

   File PAS-3 and FEMA reports

   The return of allotment goes to the ROC, and FC-GPR on the FIRMS portal for any non-resident allottee within 30 days.

How share transfers work

A transfer is simpler than an allotment, but a private company's shares aren't freely transferable, and pricing has tax consequences:

Check the articles

Private companies restrict share transfers by law. Check for pre-emption rights, board approval, or investor consent before agreeing a sale.

Transfer deed (SH-4)

For physical shares, the transferor and transferee sign Form SH-4, stamped, and it's delivered to the company within 60 days of signing.

Stamp duty

Transfers for consideration attract stamp duty of 0.015% of the value. For demat shares it's collected through the depository.

Board approval and register

The board approves the transfer and the register of members is updated. The company has one month to register it and deliver the certificates.

Pricing and tax

Price unlisted shares at or above fair market value, backed by a valuation, to avoid tax on the difference for both buyer and seller.

Non-resident parties

A transfer between a resident and a non-resident follows FEMA pricing rules and is reported in FC-TRS within 60 days.

Benefits and responsibilities