How Shareholders Can Exit Under the Companies Act, 2013?

Shareholders exit is one of the most sensitive but also one of the most important steps for a business. Whenever a company’s ownership changes through transfer of shares, transmission, buy-back, forfeiture, or reduction of share capital—it must file the required returns with the Registrar of Companies (ROC) as per the Companies Act, 2013.
This blog will explain the legal steps in clear terms. It will also give simple, practical advice for founders, boards, and advisors so they can make smart and safe choices.

Exit of a shareholder is not a one-step process. It involves legal, financial, and strategic planning to ensure fairness and compliance. Below are the key steps every company should follow.

In this blog we Explain:

• Introduction to Shareholder’s Exit
• Reasons for Shareholder Exit
• Process and mandatory documents
• Common Problems & Solutions:
• Planning & Legal Guidance
• Conclusion
• FAQ

Reasons for Shareholder Exit

Sometimes, continuing with a particular shareholder can slow down growth or cause conflicts. Exit of them may be needed to protect the company, its rules, and its future plans.

• Conflict of Interest: When a shareholder’s personal or business clash with the company’s, it can impact decisions and growth.
• Non-Compliance with Agreement: If a shareholder does not follow the Articles of Association, the Shareholders’ Agreement, or other binding arrangements, the company can take action to restrict or transfer that person’s shares.
• Financial Issues: If a shareholder fails to pay for their shares or causes money problems for the company (if authorized by its Articles) may proceed with forfeiture of shares.
• Strategic Differences: When shareholders disagree on the vision, strategy, or direction of the business, it can become hard for them to continue together. In such cases, the solution is often a mutually agreed transfer or exit.
• Legal or Ethical Concerns: If a shareholder is involved in illegal or activities, the company may safeguard itself by seeking legal remedies

Stepwise Process and Mandatory Documents

When shareholders decide to leave or exit a company, having a structured process protects everyone involved and maintains business stability. Here’s a complete guide by Finguru India to managing shareholder departures effectively.

Start with the Shareholders’ Agreement

The first step is always to review the Shareholders’ Agreement (SHA) or the Articles of Association (AoA). A well-drafted SHA provides:

• Exit rights: Whenever a shareholder exits, they are bound to follow the structured set rules of the company to ensure fair treatment. This agreement also involves the process of the exit of shareholder
• Valuation methods: The shareholders’ agreement sets how shares are valued—by assets, profits, or an expert. Often, an independent Valuation Report or Expert Certificate is obtained to make the exit price clear and fair.
• Drag-along and tag-along rights: Drag along Right allows majority shareholders to drag minority shareholders into a sale. Tag-along rights let minority shareholders sell on the same terms as the majority, protecting them from being left out.
• Dispute resolution pathways: Shareholders’ agreements often add ADR- like arbitration, mediation, or conciliation to solve disputes faster, cheaper, and without lengthy litigation.

Legal Framework Under Indian Law

The Companies Act, 2013 does not provide a single “exit” clause for shareholders, since shares are considered as property. However, it does allow for several mechanisms that effectively enable a shareholder exit:

• Share Transfer: One of the easiest ways for a shareholder to exit is by transferring their shares using Form SH-4, and the company updates its records to show the new owner. Usually, a Share Purchase Agreement (SPA) is also made to record the terms of the transfer, payment, and responsibilities, so both sides are clear and protected.
• Share Buy-Back: The company itself buys back its own shares from the shareholder. This is allowed only if it is written in the company’s Articles of Association. It requires board resolution / special resolution of shareholders ROC filings: SH-8, SH-9, SH-11 within prescribed timelines.
• Forfeiture of Shares: If a shareholder does not pay the money they owe on their shares the company can take back or cancel those shares. Forfeiture is possible only if the company’s Articles of Association permit it, and the Board passes a resolution for forfeiture after giving due notice.
• Capital Reduction or Scheme of Arrangement: A company may decide to reduce or reorganize its share capital. This could mean cutting down the number of shares or reshuffling ownership. Such changes need approval from the National Company Law Tribunal (NCLT) and filing of Form INC-28 with ROC ensure fairness and compliance.

Lead with Negotiation

Even though the law gives a framework, the easiest and most practical approach is usually direct negotiation. Working out the share value, planning a buy-out, and completing the transfer can save time and costs. This approach also keeps relations with other shareholders, smooth and prevents conflicts from going to court. Having a clear shareholders’ agreement makes it easier to discuss share values and manage the process when someone exits.

Majority Claim

Indian corporate law provide specific powers to shareholders based on ownership percentages. Understanding these is important when planning shareholder exit:
The percentage of shares a person holds in a company decides how much power they have in making decisions.

• If someone owns 10% or more, they can call for a special meeting of shareholders (EOGM) or complain to the tribunal if they feel treated unfairly.
• At 25% or more, they can block big decisions that need a special resolution, like major policy changes.
• Once a person has over 50%, they can control normal decisions since they hold the majority.
• With 75% or more, they can approve special resolutions, such as buying back company shares or changing the rules in the Articles of Association.
• With 90% or more gives almost complete control, even allowing them to force the purchase of remaining small shareholders’ shares in some cases.

Finish and Follow Compliance

After choosing the exit route, the company should:

• Draft the share transfer deed (Form SH – 4) and pass board or shareholder resolutions. These decisions should also be formally recorded in the company’s Board Meeting Minutes, which act as an official legal record of approval.
• Update the Register of Members and file forms with the ROC (like PAS-3, SH-11, and INC-28)
• If the exit requires compulsory exit, capital reduction, or restructuring, approval from the NCLT must be obtained in advance.
• Update Shareholders’ Agreement and Articles of Association to reflect changes. Insert non-compete, confidentiality, or restrictive covenants if agreed by parties.

Common Problems and Solutions

Running a company can face hurdles when shareholders disagree or exit issues come up. Knowing these problems and how to solve them helps keep the business fair and running smoothly.

• Disagreements on Decisions – Resolve as per the Shareholders’ Agreement or AoA.
• Exit Price Disputes – Get an independent valuation or expert certificate to fix a fair valuation report.
• Minority Shareholders Left Out – Enforce tag-along rights to ensure equal treatment.
• Delay in Legal Processes – Solve conflicts faster through arbitration or mediation.

Plan Ahead with Legal Guidance

Good planning makes shareholder exits smoother. A detailed shareholders’ agreement defines rights, duties, and exit rules, helping avoid disputes. Professional advice including lawyers and advisors ensure the process is legal, and cost-effective. Expert guidance from Finguru India often prevents conflicts and protects business relationships, saving the company time and money.

Conclusion

Shareholder exit is not only a legal task but also a way to keep the company steady, and ready for future growth. The process can feel complex, but with the right steps it can be smoother and legally sound. A clear shareholders’ deal gives rules for value and exit. Proper legal steps make sure the change is valid. Open talks help avoid fights and build trust. Expert’s help guides the company so rules are followed, ties stay safe, and the business does not lose focus. When done with care, exit of a shareholder supports growth, balance, and lasting success.

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