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Restriction on Transfer of shares in Private Companies

CA Pradeep Garg 
on 14 March 2017

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A private company is defined as a company which by its articles,

  • Restricts transfer of its shares in prescribed manner.
  • Prohibits invitation to public to subscribe for its shares
  • Limits its members to 50 (now 200) and
  • Prohibits acceptance of deposits from public other than members.

Therefore a private company cannot raise money from general public by issuing shares, debentures or deposits and shares & deposits in a private company are not transferable except with permission of board of directors. In practice only transmission of shares n deposits in a private company (in case of death or insolvency of holder) is permissible.

However a private company may offer its shares to specific persons with direct communication & acceptance and number of its shareholders may increase time to time and cross the limit of 200 members.

However only a few private companies have members exceeding 2-10 members and most of the private companies are family business companies only. Since a company need not declare and pay dividends even in case of good profits, private companies have huge reserves n surplus in form of accumulated undistributed profits

The object of investing into a private company business is frustrated by restriction on transfer of shares without permission of directors of the company who retain management in their hands and dissenting shareholders can only take help of court if they want to sell their holdings.

If the restriction on transfer of shares in private companies is removed from company law and manner of share transfer is processed through a separate stock exchange formed for the purpose where all private companies are required to be listed compulsorily, the businessmen shall have access to the profitability & performance of private companies also, can offer to purchase shares, earn dividend income, pay taxes and true object of private companies for development of MSME sector industries, restructuring, merger, demerger etc shall be achieved

In short, removal of restriction on transfer of shares in private companies and processing of share transfer through a separate stock exchange made for the purpose, will make private companies competitive with public companies also, promote investment in the private sector and a major avenue of generating black money by running shell companies with low capital, high reserves, nominal business will be liquidated.

Private companies will have to declare n pay dividends regularly and it will become a bench mark for large scale public companies also. Those not performing with performance bench marks, may be identified by MCA, ROC, SEBI, CBDT, CBCE, CAG and other authorities for audit, investigation and appraisal and resultant corrective action. The object of erstwhile SICA for revival of sick companies, release of blocked capital etc can also be implemented for private companies that enjoy corporate status and compliance exemptions simultaneously leading to corruption.  


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