Process of Selling Shares in Private Companies

Before initiating a sale, it’s important to understand the nature of private company shares and the restrictions that may apply.

Key Characteristics

These characteristics make selling private shares a more involved process, often requiring consent from the company or existing shareholders.

• Not listed on any stock exchange
  

• Limited liquidity due to fewer potential buyers
  

• Restrictions on transferability via shareholder agreements
  

• Subject to pre-emptive rights or right of first refusal (ROFR)

There can be several valid reasons for shareholders wanting to sell their private holdings:

• Exit strategy after investment maturity
  

• Need for liquidity to fund personal or business needs
  

• Change in ownership structure
  

• Buyout offers from other shareholders or third parties
  

Identifying the purpose helps in choosing an appropriate route.

Private companies in India are governed by the Companies Act, 2013. The Act places certain restrictions on the transfer of shares to preserve the closely held nature of the firm.

Common Restrictions Include

Understanding these restrictions beforehand helps in planning a compliant and efficient transaction.

• Board Approval: Any share transfer must be approved by the Board of Directors.
  

• Right of First Refusal: Existing shareholders must be offered the shares before they are sold to an outsider.
  

• Lock-in Period: Some investment agreements may include a time-bound restriction on selling shares.
  

• Valuation Clause: The price at which shares are sold may require agreement among stakeholders or third-party valuation.

There are multiple ways to exit or monetise shareholding in a private entity:

1. Sell to Existing Shareholders

This is the most common method due to pre-emptive rights clauses. You may approach fellow shareholders directly, and if they express interest, the deal can proceed with board approval.

2. Transfer to Third Parties

If no existing shareholder is interested, and the Articles of Association permit, you may sell to an outsider. However, this usually requires board approval and adherence to due diligence requirements.

3. Buyback by the Company

The company may choose to buy back your shares subject to availability of distributable profits and compliance with the Companies Act. This is typically an internal liquidity event, while investors in the secondary market may use tools like gtt order in stock market to plan exit strategies by placing pre-defined buy or sell orders. This is typically an internal liquidity event.

4. Sale Through ESOP Trusts or Promoters

In some start-ups or private firms, ESOP trusts or promoter groups may be interested in buying back shares as part of internal restructuring or employee incentive plans.

The process to sell private company shares in India involves several key steps:

Step 1: Review the Shareholder Agreement

Examine the shareholders' agreement or Articles of Association to understand the transfer rules, rights, and restrictions.

Step 2: Inform the Board and Existing Shareholders

Formally communicate your intent to sell and initiate the offer to other shareholders, as required under ROFR clauses.

Step 3: Obtain Valuation

Get the shares valued by a registered valuer (under the Companies Act) or a Chartered Accountant, as applicable. This helps in negotiating a fair price and may be required for regulatory compliance.

Step 4: Draft Share Transfer Agreement (STA)

An STA outlines the terms and conditions, sale price, and mode of payment. It must be signed by both parties and stamped appropriately.

Step 5: Execute Transfer and Update Records

Once the payment is completed, submit the share transfer form (Form SH-4), and hand over the share certificates. The company updates its Register of Members accordingly.

Step 6: Filing with the Registrar of Companies (if applicable)

Though not mandatory for every transfer, some cases may require reporting to the RoC under specific scenarios.

Selling unlisted shares in India may attract capital gains tax:

• Short-Term Capital Gains (STCG): If held for less than 24 months, taxed as per the applicable income tax slab.
  

• Long-Term Capital Gains (LTCG): If held for more than 24 months, taxed at 20% with indexation benefits.
  

It’s important to maintain documentation of the acquisition price and any valuation reports to accurately compute gains.

While legal pathways exist, several challenges may complicate the sale process:

• Lack of liquidity: Fewer buyers lead to longer transaction timelines.
  

• Valuation disagreements: Buyers and sellers may not agree on share pricing.
  

• Delayed board approvals: Management or shareholder conflict may create delays.
  

• Regulatory compliance: Incorrect or incomplete filings may attract penalties.
  
  

Being well-prepared with documentation and legal support can help overcome these hurdles.

Read More: What Is Minimum Public Shareholding

Transferring shares in a private company often involves legal procedures, compliance with internal agreements, and adherence to statutory requirements. Unlike public market transactions, private transfers typically include negotiations, board approvals, and possible valuation challenges. The process is shaped by shareholder rights, company norms, and regulatory frameworks. Transactions may arise from a need for liquidity or as part of a broader strategic decision, making it important to understand the procedural aspects in advance.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.