Karan's first vested ESOP holder is exercising 500 shares. His co-founder is leaving and selling back her 1,500 shares. Two transfers, in one month. "Just update the spreadsheet?" he asked his CA. No — every transfer has paperwork.
The mechanics are mechanical. Skipping them = invalid transfers = future audit headache.
- Use Form SH-4 (Share Transfer Deed) — signed by both transferor and transferee.
- Pay stamp duty 0.25% of consideration or market value (e-stamp from state portal).
- Board approves transfer via resolution within 30 days of receipt.
- Update Register of Members (Form MGT-1), issue new share certificate within 1 month, cancel old.
- Reflect in next MGT-7 / 7A annual return.
The 6-step process
Check AOA + SHA. Many Pvt Ltds have ROFR — existing shareholders get first option. Waive in writing if they decline.
Transferor + transferee sign. Includes: folio numbers, share certificate numbers, number of shares, distinctive numbers, consideration, witness.
0.25% of consideration or fair market value (whichever higher). E-stamp via state portal (e.g., gras.mahakosh.gov.in for Maharashtra). Affix on SH-4 within 60 days of execution.
Within 60 days of execution. Company secretary / director registers receipt.
Board resolution. Refusal grounds limited (AOA-specified). Refusal must be communicated in 30 days; otherwise transfer is deemed accepted.
Update MGT-1 (Register of Members) within 7 days of board approval. Issue new share certificate to transferee within 1 month. Cancel old certificate.
Stamp duty — the state-specific bit
Stamp duty rate is largely uniform at 0.25% across India (Maharashtra, Karnataka, Delhi all aligned). Some states have small variations. Pay e-stamp through the state's e-SBTR portal — affix the receipt on SH-4.
The 3 most-common mistakes
1. Unstamped SH-4 — invalid as evidence. Stamp before 60 days.
2. Forgot board resolution — transfer never legally registered. Future investor due diligence catches this.
3. Old share cert not cancelled — same shares appear under 2 people in records. Pre-IPO audit nightmare.
Transfer value vs fair market value
If you sell shares below fair market value (FMV), both buyer and seller can be taxed:
👉 Seller — capital gain computed on actual consideration; but FMV-based deemed consideration for tax (Sec 50CA / 56(2)(x)) for unlisted shares.
👉 Buyer — if shares received below FMV by more than ₹50,000, the difference is taxed as "Income from Other Sources" under Sec 56(2)(x).
Fix: Get a merchant banker / Cat-I valuer's report for the price. Pin to that price. Section 56(2)(x) won't kick in if transaction is at FMV.
For ESOP exercises specifically
ESOP exercises are technically share issues, not transfers. The mechanism differs:
👉 Board passes resolution to allot shares at strike price.
👉 File PAS-3 (Return of Allotment) with ROC within 30 days of allotment.
👉 Issue share certificate within 2 months.
👉 Update Register of Members (MGT-1).
👉 No SH-4, no stamp duty (allotment ≠ transfer).
Most founders treat the cap table like a spreadsheet. It's a legal document. Get the paperwork right at month one and you save 6 months of cleanup before any fundraise.
Quick answers
Still 0.25%. Some states have concessional rates for transfers between immediate family — verify your state's stamp act. For most, default rate applies.
File a fresh SH-4 with current date, pay stamp duty (+ penalty for delay), board ratifies. Update Register accordingly. For pre-2014 transfers, consult a CS — old Companies Act rules may apply.
Even gifts need SH-4 + stamp duty + board approval. Consideration field can show "Gift" but tax implications under Sec 56(2)(x) apply for the recipient if not from "relative" as defined.
NAV method (book value) or DCF method by a Cat-I merchant banker. Most early-stage Pvt Ltds use NAV: (net assets ÷ outstanding shares). Established companies: DCF + comparable transactions.
For 3+ shareholders or any ESOP scheme — yes. Manual spreadsheets get messy fast. Carta / Eqvista / EquityList all serve Indian Pvt Ltds. ₹15-30k/year for clean records is worth it pre-Series A.
When you might want help
One-off transfers are paperwork. Where help pays off: messy multi-shareholder transfers, valuation reports for FMV defense, ESOP exercise + PAS-3 filings, and cleanup before fundraise / due diligence (where audit firms find paperwork holes).
Cap table cleanup before fundraise?
SH-4 + stamp + board resolutions + MGT-1 update + share certs — bundled in one engagement. We do this routinely pre-Series-A.