Founders and startup investors often confuse share transfer (selling existing shares) with share allotment (issuing new shares). The two are fundamentally different: allotment increases the company's share capital and dilutes existing shareholders, while transfer simply moves existing shares from one person to another. Treating them interchangeably can lead to tax disputes, stamp duty underpayment, and legal challenges. This guide clarifies the difference with side-by-side comparisons and practical examples.
Side-by-Side Comparison
| Aspect | Share Allotment | Share Transfer |
|---|---|---|
| Definition | Company issues NEW shares to an investor | Existing shareholder sells shares to another party |
| Nature | Increase in authorized/issued capital | No change in total shares outstanding |
| Who decides | Company Board + Shareholders (resolution) | Existing shareholder (with board approval) |
| Valuation | Company decides price per share | Market or agreed price |
| Money goes to | Company (increases cash reserves) | Selling shareholder (personal benefit) |
| Form | PAS-3 (Register of Allotments) | SH-4 (Share Transfer form) |
| Stamp duty | Minimal (only on certificate if any) | 0.1% - 0.5% of transfer value |
| Tax for buyer | No capital gains on allotment | Capital gains if sold later |
| Tax for seller | N/A (company is issuer) | Capital gains if shares increased in value |
| ROC Filing | PAS-3 within 30 days of allotment | SH-4 (if required by state) |
| Shareholder dilution | Existing shareholders' % holding diluted | No dilution (shares move between shareholders) |
| Capital structure impact | Increases total authorized capital | No impact on capital structure |
Key Definitions
Share Allotment
Definition: Company issues new shares to investors. The company creates and distributes these shares as part of capital fundraising, employee stock ownership plans (ESOP), or promoter allocation.
Example: XYZ Company allots 1,00,000 new shares @ ₹100/share to Venture Capital Fund ABC, raising ₹1 crore in capital.
Process:
- Board approves allotment resolution
- Shares are issued and registered in Register of Members
- Share certificates issued to new shareholder
- ROC filing (PAS-3) within 30 days
Impact: Company now has 1,00,000 + existing shares outstanding. Total authorized capital increases. Existing shareholders' voting power diluted (unless they maintain same proportion via counter-allotment).
Share Transfer
Definition: Existing shareholder (transferor) sells shares to another party (transferee). The company does not issue new shares; it simply updates the register to reflect new ownership.
Example: Founder Rajesh sells 50,000 shares to co-founder Priya. No new shares issued; ownership of 50,000 existing shares passes from Rajesh to Priya.
Process:
- Pre-emptive rights offered to existing shareholders (wait 15 days)
- Board approves transfer
- Share transfer deed executed and stamped
- Register of Members updated (Rajesh removed, Priya added)
- New share certificates issued to Priya
Impact: No change in total outstanding shares. Ownership shifts between shareholders. Company's capital structure unaffected.
Key difference: Allotment = company creates and issues shares (capital increases). Transfer = existing shares change owner (capital unchanged).
When to Use Share Allotment
Scenario 1: Fundraising Round
Company wants to raise capital from external investors (VCs, angel investors, etc.).
Example: TechStartup Pvt Ltd closes a Series A funding round.
- Current shares: 1,00,000 @ ₹100/share = ₹10 lakh capital
- Series A investment: ₹2 crore from Venture Fund ABC
- New shares allotted: 2,00,000 @ ₹100/share
- Post-allotment: 3,00,000 shares outstanding, ₹30 lakh capital
Process:
- Board approves Series A investment and allotment terms
- Shareholders approve via special resolution (if required)
- Allot 2,00,000 new shares to Venture Fund ABC
- File PAS-3 with ROC within 30 days
- Update GST, TAN records (if investor is director/partner)
Tax impact on investor:
- No capital gains tax on allotment (receipt of new shares)
- Capital gains applies when investor later sells shares
Scenario 2: Employee Stock Ownership Plan (ESOP)
Company wants to incentivize employees via share ownership.
Example: XYZ Company allots 10,000 shares @ ₹50/share to employees under ESOP.
Process:
- Board approves ESOP scheme
- Allot shares at discounted price (below FMV - Fair Market Value)
- Employee receives shares via share certificate
- File PAS-3 with ROC
Tax impact on employee:
- Perquisite value taxed in the year of allotment (if below FMV)
- Capital gains on subsequent sale
Scenario 3: Promoter Allocation in New Company
Founders incorporate a new company and allocate initial shares to themselves.
Example: Founders Rajesh and Priya incorporate "ABC Services Pvt Ltd" with authorized capital ₹50 lakh.
- They allot 5,00,000 @ ₹1 each to themselves
- Both are now promoters with equal shareholding (2.5 lakh shares each)
Process:
- Articles of Association drafted (mentions initial capital)
- Board allots shares to founders
- File PAS-3 with ROC within 30 days
- Obtain Share Certificates
When to Use Share Transfer
Scenario 1: Founder Exit or Partial Exit
Existing founder wants to exit the company (partially or fully) and sell shares to co-founder or external buyer.
Example: Co-founder Rajesh wants to exit after 5 years. He sells his 50% shareholding to co-founder Priya.
Current shareholding:
- Rajesh: 2.5 lakh shares (50%)
- Priya: 2.5 lakh shares (50%)
After transfer:
- Rajesh: 0 shares (exited)
- Priya: 5 lakh shares (100%)
Process:
- Value shares via merchant banker (NAV or DCF method)
- Offer to existing shareholders (15-day window)
- Rajesh signs share transfer deed with Priya
- Stamp and register transfer
- Update Register of Members
- Issue new share certificate to Priya
Tax impact:
- Rajesh (seller): Capital gains tax on profit (FMV of shares @ exit - cost of acquisition)
- Priya (buyer): No immediate tax; capital gains applies on future sale
Scenario 2: Secondary Market Transaction (Investor Exit)
Investor who was allotted shares in an earlier funding round wants to exit and sell to another investor.
Example: Angel Investor ABC was allotted 1 lakh shares in Series A round 3 years ago @ ₹100/share (cost = ₹10 lakh). Now wants to exit; sells to new investor XYZ @ ₹500/share (consideration = ₹50 lakh).
Process:
- Board approves share transfer
- Angel Investor ABC signs share transfer deed
- New investor XYZ signs as transferee
- Stamp duty paid (0.1% on ₹50 lakh = ₹500)
- Register of Members updated
Tax impact:
- ABC (seller): Long-term capital gains = ₹50 lakh - ₹10 lakh = ₹40 lakh (taxed @ 20% for LTCG on unlisted shares)
- XYZ (buyer): No tax on purchase; new cost basis is ₹500/share
Scenario 3: Promoter Adds New Co-Promoter
Existing promoter wants to make a trusted person (spouse, adult child, business partner) a co-promoter by selling part of shareholding.
Example: Founder Rajesh (100% shareholder) decides to add spouse Priya as 50% co-promoter.
- Rajesh sells 50% shares to Priya @ agreed price
- Both become equal co-promoters
Process:
- Board approves transfer (may require special resolution)
- Board approves Priya as additional director (if desired)
- Share transfer deed executed
- Register of Members updated
- GST-05 amended (if Priya becomes director)
Scenario 4: Investor Buyback from Exiting Member
Company has an investor who wants to exit, and the company (or remaining shareholders) buy back the shares.
Example: Company ABC had 4 shareholders. One shareholder wants to exit; company buys back his shares.
Before buyback:
- Shareholder A: 2.5 lakh shares (25%)
- Shareholder B: 2.5 lakh shares (25%)
- Shareholder C: 2.5 lakh shares (25%)
- Shareholder D: 2.5 lakh shares (25%)
Shareholder D sells 2.5 lakh shares back to Company ABC:
- Company ABC holds 2.5 lakh treasury shares
- Remaining shareholders: A, B, C @ 25% each (proportionately increased)
Tax impact: Buyback has special tax treatment under Section 47(v) of Income Tax Act (no capital gains if conditions met).
Stamp Duty Comparison
Tax Rate Chart
Summary
Share Allotment
Share Transfer
Buyback
Share Allotment Stamp Duty: Typically ₹0 (unless state requires stamp on share certificate; max ₹100).
Share Transfer Stamp Duty:
- Telangana: 0.1% (max ₹500)
- Maharashtra: 0.1% (max ₹500)
- Gujarat: 0.1%
- Karnataka: 0.1%
- Rajasthan: 0.5%
- West Bengal: 0.25%
Example (Share Transfer):
Transfer value: ₹50 lakh
Stamp duty (Telangana): 0.1% of ₹50,00,000 = ₹500 (capped at max ₹500)
Transfer value: ₹1 crore
Stamp duty (Maharashtra): 0.1% = ₹1,000 (capped at max ₹500) = ₹500
Tax Implications Detailed
For Allotment
Investor/Allottee:
- No capital gains tax on receipt of allotted shares
- If allotted at discount to FMV, discount is taxable as perquisite
- Capital gains applies when shares are later sold
Company/Issuer:
- Receiving money from share allotment is capital contribution, not income
- No tax on money received
For Transfer
Seller/Transferor:
- Capital Gains Tax: Taxable as per Section 48 of Income Tax Act
- Calculation: Sale price - Cost of acquisition (original purchase price / allotment price)
- LTCG (Long-term): Shares held > 24 months before sale
- Tax rate: 20% with indexation benefit + cess
- Example: Bought @ ₹100, sold @ ₹500 after 3 years
- Indexed cost (inflation-adjusted) = ₹150
- LTCG = (₹500 - ₹150) × 20% = ₹70 per share
- STCG (Short-term): Shares held < 24 months
- Tax rate: Slab rates (10% to 37% + cess)
- Taxed as ordinary income (added to other income)
- Exception: Buyback shares under Section 47(v) – No capital gains tax
Buyer/Transferee:
- No tax on purchase of shares
- Capital gains applies when buyer later sells
- Buyer's cost basis becomes the transfer price
Common mistake: Transferring shares at below-market price to avoid tax. Income Tax Department treats this as part-gift, part-sale. The difference between market value and transfer price is treated as income/gift and taxed accordingly.
ROC Filing Comparison
Share Allotment Filing
Form: PAS-3 (Return of Allotments)
Timeline: Within 30 days of allotment
Filed by: Company Secretary
Contents:
- List of allottees
- Number of shares allotted
- Allotment price
- Payment details (mode and date)
Penalty for late filing: ₹100 per day of delay (max ₹5 lakh per return)
Share Transfer Filing
Form: SH-4 (Form for registration of transfer of shares)
Timeline: Within 60 days of execution of share transfer deed (varies by ROC; some don't require this filing anymore)
Filed by: Company Secretary
Note: Many ROCs have stopped requiring SH-4 filing in 2023-24; check with your registrar.
Practical Scenarios: When to Use Which
Scenario A: Startup Seed Round
Context: Founders have 1 lakh shares each (50-50 ownership). Now raising seed funding from 3 angel investors @ ₹1 crore.
Decision: Share Allotment
- Company allots 1,00,000 new shares @ ₹100 per share to 3 angels (collectively)
- Post-allotment: 3,00,000 shares outstanding
- Founder 1: 1,00,000 (33%)
- Founder 2: 1,00,000 (33%)
- Angels: 1,00,000 (33%)
- Company gets ₹1 crore in cash (increases balance sheet)
- Founders' ownership diluted but company is better capitalized
Scenario B: Founder Dispute & Partial Exit
Context: Company has 2 founders with 50-50 ownership. Dispute arises; Founder 1 wants to exit with personal gain.
Decision: Share Transfer
- Founder 1 values shares @ ₹200/share (cost was ₹10/share 5 years ago)
- Founder 1 sells 50,000 shares to Founder 2 @ ₹200/share (gets ₹1 crore personally)
- Founder 2 becomes 100% shareholder
- No new capital raised; money goes to exiting founder
- Capital structure unchanged (1 lakh shares still outstanding)
Scenario C: Private Equity Investor Exit (Secondary Round)
Context: PE investor was allotted 50,000 shares in Series B round (2 years ago @ ₹100/share). Now wants to exit.
Decision: Share Transfer
- PE investor sells 50,000 shares to another investor @ ₹400/share (considers this good ROI)
- Consideration: ₹50,000 × 4 = ₹20 lakh
- Long-term capital gains: (₹400 - ₹100) × 50,000 = ₹15 lakh (taxed @ 20%)
- New investor becomes majority shareholder or co-investor
Scenario D: ESOP Program Launch
Context: Profitable company wants to reward employees. Launches ESOP scheme.
Decision: Share Allotment
- Company allots 10,000 shares @ ₹50/share to employees (total investment by employees: ₹50 lakh)
- Employees become minority shareholders
- If FMV at allotment is ₹100/share, discount of ₹50 is taxable as perquisite to employees
- No immediate capital gains; applies on future sale
Frequently Asked Questions
Frequently Asked Questions
Can a company allot shares and then immediately buy them back?
Technically yes, but it's commercially unusual. Buyback under Section 77A-77EE has strict requirements: buyback must be approved by shareholders via special resolution, and company must have sufficient distributable profit. Direct allotment + immediate buyback may be viewed as artificial transaction by tax authorities.
If I transfer my shares, do I lose my directorship?
No. Directorship is independent of shareholding. A director can transfer all shares and still remain a director (unless articles say otherwise). Similarly, a non-director can hold shares. However, in some companies, articles may mandate director hold minimum shares; violating this may trigger auto-resignation.
Can I allot shares at a discount?
Yes, but discount is taxable. If FMV is ₹100 and you allot @ ₹60, the ₹40 discount is taxable as income/perquisite to allottee in the year of allotment (except for employee ESOP, which has concessional tax treatment).
What's the difference between authorized and issued capital?
Authorized capital is the maximum shares a company can allot (per articles). Issued capital is the shares actually allotted so far. Share allotment increases issued capital but not authorized capital (unless articles are amended). Share transfer does not change either.
If I transfer shares to my spouse, is it taxable?
No gift tax in India. However, if transfer is without consideration (true gift), it's treated as a personal transaction. If transfer is for consideration (even if below market), capital gains applies. No special exemption for spousal transfers.
Can I allot shares to a person who is not yet incorporated as a company?
No. Only entities that are already incorporated (companies, LLPs, individuals) can hold shares. You cannot allot shares to an entity that doesn't exist yet.
What if I sell shares at a loss (below cost)?
Capital loss. Loss can be carried forward for 8 years and set off against future capital gains (Section 74). Cannot be set off against ordinary income.
Do I need a shareholder resolution for share allotment?
Depends on your articles and capital limits. If allotment is within authorized capital and board has authority, only board approval is needed. If allotment exceeds authorized capital or articles require shareholder approval, special resolution is required.
Can a minor be allotted shares?
Shares can be allotted to a minor, but they must be held in the minor's name with parental guardian consent. Certificates are issued in minor's name. Transfer of such shares requires guardian's signature until minor attains majority.
Is TDS applicable on share transfer?
Yes, if transfer value exceeds ₹50 lakhs in a single transaction. Buyer must deduct TDS @ 10% under Section 194LA and deposit to government.
Decision Tree: Allotment vs Transfer
Decision Tree:
Are you raising new capital into the company?
├─ YES → Share ALLOTMENT
│ (Company issues new shares, receives cash)
│
└─ NO → Is someone exiting or changing ownership?
├─ YES → Share TRANSFER
│ (Existing shares change owner)
│
└─ NO → Are you rewarding employees?
├─ YES → Share ALLOTMENT
│ (ESOP/new shares to employees)
│
└─ NO → Check with your corporate counsel
Checklist
Before Share Allotment
- Board resolution approving allotment
- Shareholder special resolution (if required)
- Articles permit the allotment amount
- Allotment price determined (fair value)
- Payment received from allottee
- PAS-3 form prepared
- ROC filing within 30 days
- GST-05 amendment (if allottee is new director)
Before Share Transfer
- Check articles for transfer restrictions
- Pre-emptive rights offered to existing shareholders (wait 15 days)
- Board approval obtained
- Share transfer deed drafted and signed
- Stamp duty calculated and paid
- Register of Members updated
- New share certificates issued
- Tax implications assessed (capital gains liability)
Summary
Share allotment and share transfer are fundamentally different transactions. Allotment increases the company's capital via new share issuance and money inflow; transfer simply moves existing shares from one shareholder to another. Allotments are used for fundraising, ESOP programs, and founder allocation; transfers are used for founder exits, investor secondary sales, and shareholding changes. Mixing up the two can result in incorrect tax treatment, under-stamped documents, and regulatory non-compliance. Always clarify whether the transaction is an allotment (new shares, company receives money) or transfer (existing shares, seller receives money) before proceeding.
Source: Companies Act 2013, Sections 55, 62; Income Tax Act 1961, Sections 47, 48, 194LA; Indian Stamp Act 1899; Companies (Management and Administration) Rules 2014.
