Before your first investor writes a cheque, shares must move cleanly on paper. This is a plain-language guide to everything founders need to know about share allotment and transfers in Indian private limited companies.
Table of Contents
- 1. The Story Begins: A Founder and Her First Investor
- 2. Shares 101: What They Are and Why They Matter
- 3. Allotment vs Transfer: Two Very Different Things
- 4. How Share Allotment Works Step by Step
- 5. How Share Transfer Works Step by Step
- 6. The Cap Table: Your Startup's Most Important Document
- 7. What to Clean Up Before Your First Investor Meeting
- 8. Common Mistakes Founders Make
- 9. How StartupIndia.info Can Help You
- 10. Frequently Asked Questions
The Story Begins: A Founder and Her First Investor
Meet Priya. She built a B2B SaaS product for logistics companies out of her living room in Pune. Two years later she had paying customers, a co-founder named Arjun, and a registered Private Limited Company. Things were going well.
Then a Mumbai-based angel investor heard about her product and agreed to put in twenty-five lakhs in exchange for a ten per cent stake.
Priya was thrilled. She called her CA to ask what the next step was.
The CA paused and asked a simple question: “Priya, how many shares does your company have right now, and at what price were they issued to you and Arjun?”
Priya did not know the answer. She remembered signing some papers at incorporation but had never paid close attention. She found the documents and realised the company had been incorporated with just 100 shares at ten rupees each. The total paid-up capital was one thousand rupees.
Her CA gently explained that before the investor could be onboarded, several things had to happen correctly. The company had to increase its authorised share capital, pass board resolutions, get a valuation done, file paperwork with the government, and then finally issue the investor a proper share certificate.
None of this was impossible. But it took four weeks and caused the investor to wonder whether Priya ran a tight ship.
This blog exists so that you never find yourself in Priya's position. By the time you finish reading, you will understand every moving part of share allotment and share transfer in an Indian startup, and you will know exactly what to prepare before any investor conversation.
Shares 101: What They Are and Why They Matter
A share is a unit of ownership in a company. When you incorporate a Private Limited Company in India, the company has a certain number of shares. Those shares represent one hundred per cent of the ownership.
Think of the company as a pizza. The pizza is cut into a fixed number of slices. Each slice is a share. Right now you and your co-founder might own all the slices. When an investor comes in, you either cut a few new slices from a bigger pizza (allotment) or you hand over some of your existing slices (transfer).
Every company has two types of share capital you need to understand:
| Feature | Details |
|---|---|
| Authorised Share Capital | The maximum number of shares the company is legally allowed to issue. Defined in the Memorandum of Association. |
| Paid-Up Share Capital | The shares that have actually been issued to shareholders and for which money has been received. |
The face value of a share is separate from its market value. A share might have a face value of ten rupees but be worth five hundred rupees based on the company's performance. When you issue shares to an investor above face value, the difference is called the share premium. Both the face value and the premium must be correctly documented.
Allotment vs Transfer: Two Very Different Things
Founders often use these two words interchangeably. They should not. The difference matters legally and for tax purposes.
| Factor | Share Allotment | Share Transfer |
|---|---|---|
| What happens | Company creates new shares and gives them to someone | Existing shareholder sells their shares to someone else |
| Total shares | Increases (dilution occurs for existing shareholders) | Stays the same |
| Money flows to | The company | The selling shareholder |
| Governing form | Form PAS-3 filed with ROC | Form SH-4 (instrument of transfer) |
| Stamp duty | Not applicable on allotment | 0.015% of consideration or market value |
| Valuation requirement | Registered valuer certificate required for investor allotments | Registered valuer certificate required if transferee is non-resident |
| Tax implication for company | None (unless shares issued below FMV which creates deemed income) | None directly |
| Tax implication for shareholder | None at allotment stage | Capital gains tax may apply for the seller |
How Share Allotment Works Step by Step
Let us walk through every step a company must follow to legally allot shares to an investor. Skip any step and you risk penalties, invalid allotments, and investor disputes down the line.
Step 1 of 6: Pass a Board Resolution
Before any share can be allotted, the board of directors must formally approve it. This approval is recorded in a board resolution, which is a written document signed by all directors.
The board resolution must specifically mention:
- The number of shares to be allotted
- The name of the allottee (the person receiving shares)
- The price per share (face value plus premium, if any)
- The class of shares (equity or preference)
- The total consideration amount to be received
Step 2 of 6: Get a Valuation from a Registered Valuer
This is the step most founders skip, and it is the most dangerous one to miss.
When a private limited company issues shares to anyone other than its promoters at inception, the law requires that the issue price be at or above the fair market value (FMV) as certified by a SEBI-registered or ICAI-registered valuer.
Why does this matter?
- For the company: If shares are issued below FMV, the Income Tax Act treats the difference as deemed income in the hands of the investor and taxes it as income from other sources. This is the remnant of what was once called angel tax.
- For the investor: They need proof of FMV for their own tax records and for future rounds.
- For future investors: Every subsequent investor will want to see a clean chain of valuation-backed allotments going back to the beginning.
| Feature | Details |
|---|---|
| Valuation method | Discounted Cash Flow (DCF) or Net Asset Value (NAV) |
| Who can give the report | ICAI member registered as valuer, or SEBI-registered merchant banker |
| Validity of report | Generally used for the specific allotment only |
| Turnaround time | 5 to 15 working days depending on complexity |
| Cost | Varies; typically starts from Rs. 15,000 for early-stage companies |
Step 3 of 6: File Form PAS-3 with the ROC
Once shares are allotted, the company must inform the Registrar of Companies (ROC) by filing Form PAS-3 through the MCA portal.
What Form PAS-3 contains:
- Details of the allotment including number of shares and price
- Names and details of all allottees
- Certified copy of the board resolution
- Details of the return of allotment
Deadline and penalties:
| Feature | Details |
|---|---|
| Filing deadline | Within 30 days of the date of allotment |
| Late fee | Penalty starts at Rs. 200 per day of delay on top of filing fees |
| Consequence of non-filing | Allotment may be treated as void; future fundraising becomes complicated |
| Who signs | A Director and the Company Secretary (if any) |
Step 4 of 6: Update the Register of Members and Issue Share Certificates
After PAS-3 is filed, two things must happen:
First, the company must update its Register of Members. This is a mandatory statutory register that records every shareholder, the number of shares they hold, the date of acquisition, and the consideration paid. It is typically maintained in Form MGT-1.
Second, a share certificate must be issued to the allottee within 60 days of allotment. A share certificate is the physical (or digital) document that proves ownership. It must bear the company seal, be signed by at least two directors, and contain the share certificate number, the class of shares, and the number of shares allotted.
To summarise the full allotment process:
- 1Check that authorised share capital is sufficient for the new allotment. If not, increase it via MGT-14 and SH-7 filings first.
- 2Pass a board resolution approving the allotment, mentioning the investor name, number of shares, and price per share.
- 3Issue a Private Placement Offer Letter (Form PAS-4) to the investor if doing a private placement under Section 42.
- 4Receive the application from the investor and the subscription money into the company bank account.
- 5Obtain a valuation report from a registered valuer certifying the fair market value.
- 6Pass a second board resolution confirming the actual allotment after money is received.
- 7File Form PAS-3 with the ROC within 30 days of the allotment resolution.
- 8Update the Register of Members and issue a share certificate to the investor within 60 days.
How Share Transfer Works Step by Step
Share transfers happen when a founder, employee, or early investor wants to sell their shares to someone else. The company itself does not receive any money in a transfer. The money goes from the buyer directly to the seller.
Here is a story to make this concrete. Arjun, Priya's co-founder, decides after year two that he wants to exit. He wants to sell his thirty per cent stake to a new strategic investor. Before he can do that, a series of steps must be followed.
Step 1 of 4: Check the Articles of Association and Any Shareholder Agreement
Most well-drafted Articles of Association for a Private Limited Company include a Right of First Refusal (ROFR) clause. This means that before Arjun can sell his shares to an outsider, he must first offer them to the existing shareholders at the same price.
The process typically works like this:
- Arjun gives a written notice to the other shareholders stating the number of shares, the price per share, and the name of the proposed buyer.
- The existing shareholders have a fixed period (usually 30 days) to exercise their right and buy the shares at that price.
- If they decline or do not respond within the period, Arjun is free to transfer to the third party.
Step 2 of 4: Execute Form SH-4 (Instrument of Transfer)
Once ROFR has been addressed, the actual transfer is documented using Form SH-4, which is the standard Instrument of Transfer under the Companies Act, 2013.
Form SH-4 must contain:
- The name and address of the transferor (seller)
- The name and address of the transferee (buyer)
- The consideration amount
- The number and class of shares being transferred
- The folio number and share certificate number
- Signatures of both transferor and transferee
Step 3 of 4: Pay Stamp Duty on the Transfer
Unlike share allotments, share transfers attract stamp duty. As of 2026, the applicable rate is:
| Feature | Details |
|---|---|
| Stamp duty rate | 0.015% of the consideration or market value, whichever is higher |
| Who pays | Typically the transferee (buyer), unless agreed otherwise |
| When to pay | Before or at the time of executing the transfer deed (SH-4) |
| How to pay | Through state stamp duty authorities or e-stamping portals |
| Penalty for non-payment | The instrument of transfer may not be accepted as legal evidence. Additional penalties apply. |
Step 4 of 4: Board Approval and Register Update
Once SH-4 is executed and stamp duty is paid, the transferor and transferee jointly submit the documents to the company. The board of directors must then pass a resolution approving the transfer (unless the Articles give management automatic approval powers).
After board approval:
- The old share certificate in the seller's name is cancelled
- A fresh share certificate is issued in the buyer's name within 30 days
- The Register of Members is updated to reflect the new ownership
Unlike allotments, there is no separate MCA form that must be filed specifically for a transfer. However, the updated shareholding pattern will reflect in the company's annual filings (MGT-7) and any subsequent filings with the ROC.
Get End-to-End Share Transfer AssistanceThe Cap Table: Your Startup's Most Important Document
Every time you allot or transfer shares, your cap table changes. If you do not maintain it accurately, you will not know who owns what at any given moment.
A cap table (short for capitalisation table) is a spreadsheet or document that tracks:
- Every shareholder's name
- Number of shares held by each person
- Percentage ownership
- Price paid per share
- Date of allotment or transfer
- Type of shares (equity, preference, ESOP)
Here is a simple example of what a clean cap table looks like at the seed stage:
| Shareholder | Shares | Ownership % | Price Paid / Share | Date |
|---|---|---|---|---|
| Priya (Founder) | 4,50,000 | 45% | Rs. 10 | Jan 2024 |
| Arjun (Co-founder) | 4,50,000 | 45% | Rs. 10 | Jan 2024 |
| Angel Investor | 1,00,000 | 10% | Rs. 250 | April 2026 |
| ESOP Pool (reserved) | 0 | 0% | TBD | Planned |
| Total | 10,00,000 | 100% |
Keep your cap table updated after every allotment, every transfer, and every ESOP grant. Make it a habit, not an afterthought.
What to Clean Up Before Your First Investor Meeting
You have a product. You have traction. An investor wants to meet you next Tuesday. Here is your compliance checklist for share-related matters before you walk into that room.
1. Confirm your authorised share capital is sufficient
If the round will require more shares than your current authorised share capital allows, start the process of increasing it now. Increasing authorised capital requires passing a special resolution and filing Forms SH-7 and MGT-14 with the ROC. This takes at least two to three weeks.
2. Verify all past allotments have been filed with ROC
Log in to the MCA portal and check whether a PAS-3 was filed for every allotment your company has ever made, including the original subscription shares issued to founders at incorporation. If any PAS-3 is missing, file it immediately with the applicable late filing fees.
3. Ensure your Register of Members is up to date
The Register of Members must show every allotment and transfer in chronological order. Cross-check it against your MCA filings. If there are discrepancies, resolve them before investor due diligence begins.
4. Locate and organise all share certificates
Every shareholder should have a physical or digital share certificate. If any certificates are missing or were never issued, get duplicate certificates issued by the board. A company without proper share certificates cannot complete an investment round cleanly.
5. Draft or review your Shareholders Agreement
If you already have a co-founder, make sure you have a Shareholders Agreement that covers vesting schedules, ROFR, drag-along rights, and what happens if a founder exits. Investors will often request to join this agreement or replace it with a new one. Having a clean one in place signals maturity.
6. Reconcile your cap table with ROC records
Your cap table should match exactly what is recorded with the ROC. If there is any mismatch, an investor's lawyer will catch it during due diligence. Fix it before that happens.
Common Mistakes Founders Make
These are the most frequent share-related mistakes we encounter when founders come to us just before a fundraise. Read them carefully.
Mistake 1
Incorporating with only 100 shares at Rs. 10 each
Starting with a tiny share capital sounds harmless but creates problems at the first funding round. When you try to allot a meaningful percentage to an investor, the per-share price becomes very high or the total share count creates awkward fractions. Incorporate with at least 10,000 to 1,00,000 equity shares from the start.
Mistake 2
Not getting a valuation report before allotting shares to investors
Without a registered valuer report, any allotment above face value can be challenged by the income tax department. Even though angel tax on domestic investors is abolished, the valuation requirement under income tax rules still applies. Always get a certified valuation.
Mistake 3
Receiving investor money before board approval
Some founders accept money from an investor informally before passing a board resolution. This creates a legal problem because the money sits in the company account without a corresponding allotment. The Companies Act requires that the allotment happen within 60 days of receiving the application money.
Mistake 4
Skipping PAS-3 filing because it seems like paperwork
PAS-3 is not optional. It is a statutory requirement. Non-filing attracts penalties on the company and its directors. Worse, it means the allotment is not on record with the government, creating a gap that future investors will not accept.
Mistake 5
Transferring shares between co-founders without following ROFR
When one co-founder wants to exit and transfers shares directly to a friend or family member without offering to existing shareholders first, it violates the Articles and potentially the Shareholders Agreement. This can lead to the transfer being challenged and the new shareholder not being recognised.
Mistake 6
Not updating the cap table after every event
A cap table that is six months out of date is worse than no cap table at all because it gives you a false picture of ownership. Update it the moment any allotment, transfer, ESOP grant, or buyback happens.
How StartupIndia.info Can Help You
At StartupIndia.info, we are a CA-led team that has helped hundreds of Indian startups get their equity structure right. We work with founders from the day of incorporation all the way through their Series A and beyond.
Here is what we handle for you:
Share Allotment and PAS-3 Filing
We draft the board resolution, prepare the PAS-3 return, coordinate with a registered valuer for FMV certification, and file everything with the ROC within the 30-day window.
Share Transfer and SH-4 Execution
We prepare Form SH-4, advise on stamp duty payment, handle the ROFR notice process, get board approval documented, and update the Register of Members.
Cap Table Cleanup and Verification
We reconcile your internal cap table with your MCA records, identify any gaps, and create a clean, investor-ready cap table that matches all statutory documents.
Authorised Capital Increase
If your authorised capital needs to be increased before a round, we handle the special resolution, MGT-14, and SH-7 filing to get you ready to allot.
Shareholders Agreement Drafting
We draft or review Shareholders Agreements and ensure ROFR, drag-along, tag-along, and vesting clauses are correctly captured.
Full Investor Onboarding Support
From term sheet to share certificate, we manage the entire investor onboarding process end-to-end so you can focus on building your product.
We also offer a complete MCA compliance package that covers all your annual filings, director KYC, and other statutory requirements so that your company stays in good standing with the Registrar of Companies at all times.
Explore MCA and Share Allotment ServicesIf you are preparing for a fundraise and want a second opinion on your equity structure, our team is available for a consultation. We will review your cap table, check your MCA filings, and tell you exactly what needs to be fixed before you talk to investors.
Book a Free ConsultationFrequently Asked Questions
What is the difference between share allotment and share transfer?
Share allotment means the company creates new shares and issues them to a person, increasing the total share count. Share transfer means an existing shareholder passes their shares to someone else. The total share count stays the same in a transfer.
How many days does a company have to file PAS-3 after allotting shares?
A private limited company must file Form PAS-3 with the Registrar of Companies within 30 days of the date of the board resolution approving the allotment. Late filing attracts a penalty of Rs. 200 per day in addition to standard filing fees.
Is a valuation report mandatory when issuing shares to an angel investor?
Yes. Whenever a private limited company issues shares to a non-promoter investor, the issue price must be at or above the fair market value as certified by a registered valuer. This requirement remains in force even after the abolition of angel tax under Section 56(2)(viib).
What stamp duty applies on share transfers in India?
Stamp duty on share transfers is 0.015% of the consideration amount or the market value of the shares, whichever is higher. This must be paid on the instrument of transfer (Form SH-4) before or at the time of its execution.
Can a startup founder transfer shares without board approval?
No. For a private limited company, every share transfer must be approved by the board of directors. Additionally, the Articles of Association typically impose a Right of First Refusal (ROFR) that must be offered to existing shareholders before any transfer to an outside party.
What is a cap table and why does it matter before raising funds?
A cap table (capitalisation table) is a document that records every shareholder, the number of shares they hold, the percentage ownership, and the price paid. Every investor scrutinises it before committing funds. A clean, accurate cap table backed by proper documentation signals that founders take governance seriously.
What happens if a company does not file PAS-3 on time?
Failure to file PAS-3 within 30 days attracts a monetary penalty on the company and its officers. More critically, the allotment will not be on government record, which creates a compliance gap that future investors and their due diligence teams will flag. Any further fundraising will be complicated until the filing is regularised.
What is the minimum share capital for a Private Limited Company in India?
As of 2026, there is no minimum paid-up capital requirement. However, we recommend starting with at least 10,000 equity shares of Rs. 10 each so that you have enough share capital to work with when you bring in investors.
Ready to Get Your Equity Structure Right?
Whether you are onboarding your first angel investor, cleaning up your cap table, or preparing for a Series A, our CA-led team is ready to handle every aspect of your share allotment and transfer process. Let us make sure everything is clean before investors look.