What is the procedure of share transfer audit?

Share Transfer Audit:

It is no part of an auditor’s duty to check the share transactions in detail but he is usually asked to undertake the audit of share transfer for which he is paid an extra remuneration.

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Its objects are:

(i) To prevent clerical errors, and

(ii) To prevent the improper issue of Duplicate Share Certificates or certified transfers (whether fraudulently or otherwise).

Under section 108, it is provided that a company shall not register a transfer of shares (or debentures of) in the company unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or if no such certificate is in existence, along with the letter of allotment of shares (or debentures).

Provided that where, on an application in writing made to the company by the transferee and bearing the stamp required for an instrument of transfer, it is proved to the satisfaction of the Board of directors that the instrument of transfer signed by or on behalf of the transferor and by or on behalf of the transferee, has been lost, the company may register the transfer on such terms as to indemnity as the Board may think fit:

Provided further that nothing in this section shall prejudice any power of the company to register as shareholder or debenture-holder any person to whom the right to any shares in, or debentures of, the company has been transmitted by operation of law.

(1A) Every instrument of transfer of shares shall be in such form as maybe prescribed, and-

(a) every such form shall, before it is signed by or on behalf of the transferor and before any entry is made therein, be presented to the prescribed authority being a person already in the service of the Government, who shall stamp or otherwise endorse thereon the date on which it is so presented, and

(b) in the case of shares dealt in or quoted on a recognised stock exchange, at any time before the date on which the register of members is closed, in accordance with law, for the first time after the date of the presentation of the prescribed form to the prescribed authority under clause (a) or within (twelve) months from the date of such presentation, whichever is later;

(ii) In any other case, within two months from the date of such presentation.

(1B) Notwithstanding anything contained in sub-section (1A), an instrument of transfer of shares, executed before the commencement of section 13 of the Companies (Amendment) Act, 1965 (31 of 1965), or executed after such commencement in a form other than the prescribed form, shall be accepted by a company,

(a) in the case of shares dealt in or quoted on a recognised stock exchange, at any time not later the expiry of six months from such commencement or the date on which the register of members is closed in accordance with law, for the first time after such commencement, whichever is later;

(b) In any other case, at any time not later than the expiry of six months from such commencement.

(1C) nothing contained in sub-section (1A) and (1B) shall apply to­te) any share –

(i) which is held by a company in any other body corporate in the name of a director or nominee in pursuance of sub-section (2), or as the case may be, sub-section (3), of section 49, or

(ii) which is held by a corporation, owned or controlled by the Central Government or a state Government, in any other body corporate in the name of a director or nominee, or

(iii) In respect of which a declaration has been made to the Public Trustee under section 153B, if-

the company or corporation, as the case may be, stamps or otherwise endorses, on the form of transfer in respect of such share, the date on which it decides that such share shall not be held in the name of the said director or nominee or, as the case may be, in the case of any share in respect of which any such declaration has been made to the Public Trustee, the Public Trustee stamps or otherwise endorses, on the form of transfer in respect of such share under his seal, the date on which the form is presented to him, and the instrument of transfer in such form, duly completed in all respects, is delivered to the-

(a) Body corporate in whose share such company or corporation has made investment in the name of its director or nominee, or

(b) Company in which such share is held in trust, within two months of the date so stamped or otherwise endorsed:

Or

(b) Any share deposited by any person with –

(i) The State Bank of India, or

(ii) Any scheduled bank, or

(iii) any banking company (other than a scheduled bank) or financial institution approved by the Central Government by notification in the official Gazette (any such approval may be accorded so as to be retrospective to any date not earlier than the 1st day of April, 1966), or

(iv) The Central Government or a State Government or any corporation owned or controlled by the Central Government or a State Government, by way of security for the repayment of any loan or advance to, or for the performance of any obligation undertaken by, such person, if-

(1) The bank, institution, Government or corporation, as the case may be, stamps or otherwise endorses on the form of transfer of such share –

(a) The date on which such share is returned by it to the depositor, or

(b) in the case of failure on the part of the depositor to repay the loan or advance or to perform the obligation, the date on which such share is released for sale by such bank, institution, Government or corporation, as the case may be, or

(c) where the bank, institution, Government or corporation, as the case may be, intends to get such share registered in its own name, the data on which the instrument of transfer relating to such share is executed by it; and

(2) The instrument of transfer in such form, duly completed in all respects, is delivered to the company within two months from the date so stamped or endorsed.

Explanation : Where any investment by a company or a corporation in the name of its director or nominee referred to in clause (A) (i) or clause (A) (ii), or any declaration referred to in clause (A) (iii), or any deposit referred to in clause (B), of this sub-section is made after the expiry of the period of date mentioned in clause (a) of sub-section (IB) or after the expiry of the period mentioned in clause (b) of that sub­section, as the subject of such investment, declaration or deposit, means the prescribed form; or

(c) Any share which is held in any company by the Central Government or a State Government in the name of its nominee, except that every instrument of transfer, which is executed on or after the 1st day of October, 1966, in respect of any such share shall be in the prescribed form.

(1D) Notwithstanding anything in sub-section (1A) or sub-section (1B) (or sub-section (1C)), wherein the opinion of the Central Government it is necessary so to do to avoid hardship in any case, that Government may on an application made to it in that behalf, extend the periods mentioned in those sub-sections by such further time as it may deem fit (whether such application is made before or after the expiry of the periods aforesaid); and the number of extensions granted hereunder and the period of each such extension shall be shown in the annual report laid before the Houses of Parliament under section 638).

(2) In the case of a company having no share capital, sub-section (1) shall apply as if the references therein to shares were references instead of the interest of member in the company.

Section 109 lies down that a transfer of the share or other interest in a company of a deceased member thereof made by his legal representative shall, although the legal representative is not himself a member, be as valid as if he had been a member at the time of the execution of the instrument of transfer.

Section 110 required that an application for the registration of a transfer may be made either by the transferor or by the transferee and where such an application relates to partly paid-up shares, the transfer shall not be registered, unless the company gives notice of the application to the transferee and the transferee makes no objection to the transfer within two weeks from the receipt of the notice.

Notice to the transferee shall be deemed to have been duly given if it is dispatched by pre-paid registered post to the transferee at the address given in the instrument of transfer, and shall be deemed to have been duly delivered at the time at which it would have been delivered in the ordinary course of post.

Blank Transfer:

Under a blank transfer, the transferor hands over to the transferee the Share Certificate with a transfer from completely blank except for the signature of the transferor. Its advantage is that the transferee shall be at liberty to sell the shares again to a subsequent buyer without disclosing his own identity and without paying for the transfer stamp.

Evils Associated with a Blank Transfer

1. Concealment of the identity of the real owner.

2. Evasion of Tax.

4. Creation of fictitious transactions in the books to manipulate accounts.

The provisions of section 108 (as amended by the Companies Act, 1965) apply for curbing down the above evils.

Every instrument of transfer of shares must be in the prescribed form and before it is signed by the transferor, and before any entry is made in it, presented to the prescribed authority that shall stamp or otherwise endorse thereon the date on which it is so presented.

It should then be executed by the transferor and the transferee and completed in all other respects and should be presented to the company for registration. Presentation to the company should be made.

(i) In the case of shares dealt on a recognized stock exchange before the closing of the Register of Members, in accordance with the provisions of the Act or within two months, whichever is later, and (ii) in any other case within twelve months from the date of presentation to the prescribed authority.

An instrument of transfer not in conformity with the above provisions (in sub-section 1A) shall not be accepted by the company. Also, it shall not be accepted by the company if presented after six months from the date of commencement of the Amendment Act, 1965 (i.e., 15th October, 1965) or the date on which the Register of Members is closed, in accordance with law, for the first time after such commencement, whichever is later, in any other case, at any time not later than the expiry of six months from such commencement.

The Government has reserved the right to extend the period in order to avoid any hardships in any case. These provisions do not apply to shares deposited by way of security with any approved Banking Company or Financial Institution.

The basic principles have recently been restated by the Gujarat High Court in Pranlal Jayanand Thakur vs. Vasudev R.amchandra Shelat (1973) as given below:

An instrument of transfer which carries no entry except the signature of the transferor is a valid instrument.

A person to whom such an instrument is delivered along with share scrip gets an implied authority to complete the instrument.

The transferee acquires good title to the shares if he has received the documents in good faith and for consideration.

The facts of the case were that the transferee had received the shares under a Gift Deed from a lady who signed blank transfer forms which, however, could not be registered before her death.

The other heirs having claimed the shares, the Court held that the transferee had not acquired a good title to shares as he had received them without consideration.

Thus, the transferee gets a good title if the transfer is registered during the lifetime of the transferor. But if the transferor dies before registration, the other heirs can question the validity of the gift.

The Supreme Court has overruled the decision in Vasudev Ramachandra Shelat vs. Pranlal Jayanand Thakur (1974) and has held that on these facts a complete equitable and legal ownership is transferred to the transferee and he is entitled to have the transfer registered in the company’s registers.