SHARES TRANSFER AUDIT

Frequently, big companies require auditors to undertake audit of share transfer recorded the company during the previous year. The object of such an audit is detection of mistakes in the registration of transfers which may have the effect of saddling the company with the liability for damages claimed a shareholder on account of losses suffered in consequence thereof. The various steps which are considered necessary for carrying out such an audit are given below :
1. Ascertain whether notices were sent in every case to the transferors and, in case of joint-holders, to each of the holders and the objections, if any, raised them were taken into consideration before the transfers were registered.
2. Verify that in the case of partly paid shares, where the application for registration was made the transferor, a notice invariably was sent to the transferee and the transfer was registered only when “no objection” had been received from him, within two weeks from service of notice on him
[Section 110(2)].
3. Scrutinise Transfer forms, noting specially :

  •  that in every case, the application for transfer was made in the prescribed form and the prescribed authority (contemplated in Clause 1A of Section 108) had stamped the data on which it was presented to it; also that it was delivered to the company :
  1.  in case of ‘quoted’ shares before the Register of members were closed for the first time subsequent to the transfer within twelve months from the date of presentation of the application to the prescribed authority whichever is later;
  2.  in any other case within two months from the date of such presentation;
  •  that each transfer form is properly executed and bears the appropriate stamp duty;
  •  that the name of the company is correctly stated on the form;
  • that where the consideration for transfer appears to be inadequate, an enquiry was made the company for ascertaining the reasons therefore. (This is not necessary if the Transfer Form bears the seal of the Collector of Stamps);
  •  that the alterations, if any, have been suitably initialed; and
  •  that the name and address of the transferee have been recorded completely and fully for purposes of correspondence.

4. Compare the signature of each transferor Form with his signature on the original application for shares or on the Transfer Form (when shares were acquired on a transfer).
5. Ascertain that none of the transferees is disqualified from holding shares in the company.
6. Vouch the entries in the Share Transfer Journal reference to the transfer forms, noting in each case :

  •  the name of transferor;
  •  the name and address of the transferee;
  •  the number and class of shares transferred; and
  • the distinctive number, if any, of the Share Transfer.

The Transfer Forms, after they have been checked, should be marked and the transferor’s share certificate cancelled to prevent the same being presented once again in support of another transfer. The distinctive number of shares, if any, on the shares certificate surrendered, should be verified reference to the distinctive numbers recorded in the member’s Register. In the case of a transfer registered in the absence of share certificate, the Letter of Indemnity or
any other documentary evidence on the basis of which the transfer has been registered should be inspected.
7. Verify reference to the Minute Book of the Board of Directors that all the transfer recorded in the Transfer Journal have been approved the Board.
8. Confirm that every clerk who was entrusted with certain duties as regards the registration of transfers has initialed the documents verified him.
9. Check the postings of distinctive numbers of shares transferred and the name of transferors and transferees into the Register of Members from the Share Transfer Journal.
10. Verify the particulars entered on counterfoils of shares certificate issued to the transferees in pursuance of the transfers registered reference to Directors’ Minute Book. In case where only a part of the shares have been transferred out of those mentioned in a Share Certificate, verify the issue of Balance Certificates to the transferor and confirm that the distinctive numbers of shares are correctly stated.
11. Verify that every duplicate Shares Certificate in lieu of the one lost or destroyed has been issued under the consent of the Board and on the conditions prescribed the Board as regards production of evidence or execution of a Bond of Indemnity.
12. Ascertain, in cases where share certificates have been issued in replacement of old certificates, whether such a fact was entered on the face of the Certificate and also whether such a fact was entered on the stub of the counterfoil. Further, that in case of duplicate issued in lieu of the one
lost or destroyed the undermentioned statement was entered on the duplicate Share Certificates and also stated on the stub of the counterfoil;
“Duplicate issued in lieu of Share Certificate No. ……”
13. Confirm that in either of the above mentioned two cases, the word “Duplicate” was punched or stamped in bold letters across the face of the Share Certificate.
14. Trace the essential particulars from the counterfoils of the Share Certificate issued in lieu of those lost or destroyed into both the Register of Members and in the Register of Renewed or Duplicate Certificates.
15. Confirm that the forms of share certificates are printed only under the authority of the Board and that a person, appointed the Board, is in custody of all he unused stock of Share Certificates, as well as, the blocks and other equipment employed for their printing and that the person appointed is responsible for rendering an account thereof.

Note : The Depositories Act, 1996 requires that nothing contained in section 108 relating to transfer shall apply to transfer of security effected the transferor and transferee both of whom are entered as beneficial owners in the records of a depository.
Transmission – In the case of transmission of shares registered on the death or insolvency of a shareholder, the auditor should see :

  •  that the procedure prescribed the Articles in this regard has been strictly followed.
  •  that in case of transmission on death of any executor the undermentioned documents relating to his authority for such a transfer were examined the company:
  1.  the grant of probate or succession certificate of Power of Attorney; and
  2.  a request from the executor that the shares be entered in his name. Ascertain that particulars of those documents are entered in a register specially maintained for the purpose; and
  •  that in the case of a transmission on insolvency, the order of the Court and any other document relevant thereto was examined; also refer to the Minutes of the Board of Directors approving the transmission.

Transmission of shares is generally governed the provision contained in the Articles of Association. Section 109A inserted the Companies (Amendment) Act, 1999 provides for the facility of nomination. The nominee can either be individual or a company. Section 109B accordingly deal with registration of nominee shareholder, his rights and duties.
General :

  1.  Reconcile the amount of transfer fees collected with total number of transfers lodged and verify that the amounts of transfer fees have been accounted for.
  2.  Reconcile the total number of shares of different classes issued the company with the total amount of capital issued and its sub-divisions extracting balance of shares held different members from the Member’s Register.
  3.  Confirm that, in case of transfer registration whereof was refused, the notice of refusal was sent to the transferor and the transferee within a period of two months (Section 111). Further section 111A relating to rectification of register pursuant to the Depositories Act, 1996, contains relevant provision enabling the Tribunal to direct rectification of registers.
  4.  Confirm that, in case any shares held Directors have been transferred them, corresponding entries have been made in the Register of Director’s shareholding.
  5.  Confirm that if a company has refused to register the transfer of or the transmission operation of law the right to any shares within 2 months from the date on which the instrument of transfer or the intimation of such transmission was delivered to the company has sent notice of the refusal to
    the transferee and the transferor or the person giving intimation of such transmission as the case may be giving reasons for such refusal.

Note – Students should also refer to study material on Company Law for restrictions on transfer of shares. Further, it may be noted that sections 108A to 108G which intended to restrict acquisition and transfer of shares of or companies shifted to the MRTP Act, 1969 have been transferred back to the
Companies Act, 1956.

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