• Invest in India
  • Corporate Legal Services

Transfer of Beneficial Interest in Shares

May 29, 2020     by Kirti Arora

No one can give what they don’t have”. In most of the cases, beneficial interest is created through a contract between the registered owner and the beneficial owner, which also governs the rights of nominee/registered holder relating to transfer of shares, right to receive dividend, right to vote, etc. However, in cases where no agreement is in place, the questions arise concerning the rights of the registered owner and in such situations, the relationship of registered owner and beneficial owner is governed by their mutual understanding. The latter scenario gives rise to certain questions which creates uncertainty for owners and the most common question which bewilders the owners is whether a registered owner can transfer the shares at his/her own will.

Through this write-up, we intend to answer some common queries related to transfer of shares which are held by registered owner.

Transfer of Beneficial Interest in Shares

Beneficial interest in a share includes the entitlement to exercise any or all the rights attached or to receive any dividend or other distribution in respect of such share. By transferring the beneficial interest in shares, one not only transfer the benefits arising out of such shares to the other person but also the actual ownership of such shares. However, Section 89 (9) of the Companies Act, 2013 provides that it is the obligation of a company to pay dividend to its registered members and the said obligation shall, on such payment, stand discharged.

You can visit our blog on Rights and Obligations of a Beneficial Owner to understand the concept of beneficial ownership.

The Companies Act, 2013 (“the Act”) deals with disclosure obligation (Section 89 of the Companies Act, 2013) relating to change in beneficial interest in shares. There are some interesting questions which are often raise w.r.t transfer of beneficial interest in shares.

  1. Whether Registered Owner can transfer such shares wherein the actual ownership rights are vested with the Beneficial Owner?
  2. There is always a dilemma with respect to right of registered owner to transfer his/her shareholding at his/her own will. There are no explicit provisions under the Companies Act, 2013 which restrict the registered shareholder to transfer shares to another person. However, Sale of Goods Act, 1930, states that in case of sale of goods (which includes shares or stock) by a person who is not the actual owner of the goods, the benefits attached to the goods shall not be transferred to the buyer unless the actual owner consents to the same.  It is based on the principle ground “Nemo dat quod non habet” which means “no one can give what they don’t have”. Hence, considering that a nominee acts and holds shares on behalf of the beneficial owner, i.e. as a trustee, he must act as per the directions of the beneficial owner. However, the company is not under any obligation under the Companies Act to question the transaction as long as the same has been authorised by the registered owner of the shares. Disclosures made under section 89 are not directions to the company.

  1. What are the compliances to be done in case of transfer of Beneficial Interest in shares?
  2. Apart from the right of registered owner to transfer the shares, there are always ambiguity with respect to compliances required in case of change in beneficial owner (while the registered holder remains same).

    As per the provisions of Section 89 of the Act, in case of change in the beneficial ownership, the registered owner and the beneficial owner shall file a declaration with the Company in Form MGT-4 and MGT-5 respectively within 30 days from the date of such change. On receipt of Form MGT-4 and MGT-5, the company shall take note of such declaration and shall file a return in Form MGT-6 with the Registrar within 30 days from the date of receipt of such declaration.

  1. Whether transfer deed in Form SH-4 shall be executed in case of transfer of Beneficial Interest in shares?
  2. As nothing specific has been mentioned in the Act, our understanding is that transfer deed in Form SH-4 shall not be executed as only the beneficial interest of shares are being transferred. The requirement to execute transfer deed shall arise only when a person (transferee) intends to register the shares in his/her name in the register of members of the Company as the registered owner.

    To conclude, the Act mandates to execute transfer deed only when there is a change in the registered ownership of shares. In cases, where beneficial interest in shares are transferred, the Act only provides to make a declaration to that effect.

You may also like to read our article on taxation aspects of beneficial ownership.

Leave a Reply

Your email address will not be published. Required fields are marked *


[recaptcha]

Please Fill All Field