ROC penalizes company and its director for effecting transfer of shares without payment of the consideration.

January 15, 2026

Case Study

To understand the consequences relating to default in complying with Section 56 relating to transfer of securities under the provisions of the Companies Act, 2013, let us go through the case decided on 28th March 2025 by the Registrar of Companies, Kolkata in the matter of M/s Pre-Stressed Udyog (India) Private Limited.

M/s Pre-Stressed Udyog (India) Private Limited was incorporated on 17th December 1981 under the Companies Act, 1956 and has its registered office in Kolkata, West Bengal. The company has two directors on its Board and is primarily engaged in construction-related activities.

Facts of the Case

An inquiry under Section 206(4) of the Companies Act, 2013 was conducted into the books and accounts of the company. The inspection report highlighted the following non-compliances under Section 56:

• A Share Purchase Agreement dated 21st February 2017 was entered into between the Varma Group and the Pradhan Group. Although the consideration was not fully paid, shares were fraudulently transferred to the Pradhan Group.
• The transfer of shares was shown on 15th March 2017 through e-Form MGT-7 and later revised on 26th December 2019, indicating an afterthought to defraud the Varma Group.
• The transfer was based on an indemnity bond executed on 22nd June 2017, which was after the due date of transfer.
• The provisions of Section 56(1) were wrongly invoked since the instrument of transfer was not executed due to non-payment of consideration.
• The indemnity bond was signed by Pradhan Group individuals as directors instead of in their personal capacity as transferees.

Clarification Sought by ROC

The ROC directed the company and its directors to submit clarifications along with supporting documents, including bank statements evidencing payment of consideration.

Reply Submitted by the Company and Directors

• The company stated that full consideration was paid through bank transfers after adjusting liabilities, and allegations of fraud were denied.
• Revision of e-Form MGT-7 was done solely to rectify clerical errors as permitted by the Ministry of Corporate Affairs.
• Transfer of shares was effected on 15th March 2017 based on the Share Purchase Agreement, as the sellers failed to deliver signed transfer instruments and share certificates.
• The sellers delayed handing over share certificates and claimed they were misplaced, thereby acting in bad faith.
• Allegations that consideration was not paid were termed defamatory.

Conclusion by the Registrar of Companies

After examining the facts and submissions, the ROC concluded that the company and its directors violated Section 56 of the Companies Act, 2013 by transferring shares without receipt of consideration before issuance. Accordingly, penalties under Section 56(6) were imposed.

Penalty Imposed

Section 56 of the Companies Act, 2013 – Key Provisions

• Proper Instrument: Transfer requires a duly stamped, dated, and signed transfer form.
• Time Limit: Instrument must be submitted within 60 days of execution.
• Share Certificate: Share certificate or letter of allotment must be attached.
• Partly Paid Shares: Transferee must be notified and given 2 weeks to object.
• Company Records: Transfer must be recorded in the Register of Members.
• Issue of Certificate: New certificate must be issued within 1 month.
• Payment of Consideration: Transfer without payment is void and invalid.

Instrument of Transfer – Form SH-4

Form SH-4 is the mandatory instrument of transfer under Section 56 read with Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014. It must clearly mention consideration and be duly stamped and executed.

Penalty for Non-Compliance

• Company and officers in default: Penalty of ₹50,000 each.
• Fraudulent transfers: Liability under Section 447, including imprisonment and fines up to three times the fraud amount.