A startup can raise capital without issuing new shares. It can also enable an existing shareholder to sell some or all of their holdings without the company raising any money at all.
This happens through a secondary share sale, a transaction in which an existing shareholder sells shares to another investor or buyer. In India, these transactions can provide liquidity to founders, early investors and employees who hold shares, while allowing new investors to acquire an existing stake in the company.
However, a secondary sale involves more than agreeing on a price. The parties must consider transfer restrictions, valuation, tax liabilities, shareholder rights, regulatory requirements and the impact on the company's ownership structure.
Understanding these factors before signing a deal can help founders and shareholders avoid delays, unexpected costs and disputes.
A secondary share sale is a transaction in which an existing shareholder sells shares to another person or entity. The buyer pays the selling shareholder, rather than subscribing to newly issued shares from the company.
This distinguishes a secondary sale from a primary fundraising round.
In a primary investment, a company issues new shares and receives the investment proceeds. In a secondary sale, existing shares change ownership, and the selling shareholder receives the proceeds.
For example, an Indian startup has 100,000 issued equity shares. Its founder owns 60,000 shares, and an early investor owns 40,000.
The early investor sells 10,000 shares to a new investor. After the transfer, the early investor holds 30,000 shares, the new investor holds 10,000, and the founder continues to hold 60,000.
The total number of issued shares remains 100,000. No new equity has been created, and the company has not received the sale proceeds.
This distinction matters because a secondary sale changes the distribution of ownership without automatically increasing the company's cash reserves or diluting shareholders through a fresh issue.
Secondary sales can serve different purposes depending on the company's stage and the seller's objectives.
An early investor may want to realise part of an investment after holding shares for several years. A founder may sell a limited portion of their stake to diversify personal wealth. An employee who owns shares may seek liquidity if the company permits a sale. A new investor may acquire shares from existing holders as part of a broader investment transaction.
Consider a startup that has completed several funding rounds. An early angel investor has supported the company for six years, but the business has not yet had an acquisition or public listing. A later-stage investor is willing to purchase part of the angel's holding.
A secondary transaction could give the angel partial liquidity while bringing a new shareholder into the business.
However, liquidity should not be confused with company fundraising. If the startup needs additional working capital, a secondary sale alone will not meet that requirement unless it is combined with a primary investment.
The process depends on the company's legal structure, the type of securities being transferred and the parties involved. For an Indian private limited company, the following stages provide a useful framework.
Before negotiating the final transaction, review the Articles of Association (AoA), shareholder agreements and any relevant investment documents.
These may contain restrictions such as rights of first refusal, pre-emptive rights, permitted-transferee conditions, lock-in periods or requirements for board approval.
For example, a founder may wish to sell shares to an external investor, but an existing investor may have a contractual right to purchase those shares first. The proposed sale may need to follow that procedure before it can proceed.
Founders should also consider whether the transaction could affect board composition, voting arrangements or other negotiated rights.
A buyer and seller agreeing on a price does not automatically mean the transfer can be completed without satisfying the applicable restrictions.
The parties should establish the number and class of shares being sold, the purchase price, payment terms, completion conditions and the intended completion date.
The agreement should also address representations and warranties, responsibility for taxes and transaction costs, required approvals, and the consequences if the transaction does not complete.
Suppose an investor agrees to buy 5,000 shares at ₹400 per share. The total consideration is ₹20 lakh.
That figure represents the transaction price for the shares being sold. It does not necessarily establish the definitive value of the entire company, particularly if the transaction involves a minority stake, different share rights or negotiated conditions.
The parties should also determine whether the sale is independent or linked to a primary funding round, acquisition or other corporate transaction.
The agreed price may have legal and tax implications, especially for unlisted shares.
A founder selling shares to an independent investor may negotiate a price based on the company's performance, growth prospects, comparable transactions and the rights attached to the shares. However, the agreed consideration should also be assessed against the relevant tax provisions and any applicable foreign investment pricing requirements.
For example, if an unlisted startup's shares are sold below their prescribed fair market value, Section 50CA of the Income-tax Act, 1961 may affect the seller's capital gains calculation in applicable circumstances. Section 56(2)(x) may also create tax implications for a buyer who receives shares for inadequate consideration, subject to the relevant rules and exceptions.
Where a non-resident is involved, FEMA regulations and applicable pricing requirements may impose additional conditions. The parties should not assume that a price acceptable for a domestic transaction automatically satisfies the requirements for a cross-border transfer.
An appropriate valuation assessment before signing can help identify these issues early.
For transfers of shares in an Indian company, the applicable procedure depends on whether the securities are held in physical or dematerialised form and whether other regulatory requirements apply.
Section 56 of the Companies Act, 2013 governs the transfer and transmission of securities. For transfers covered by the physical-transfer procedure, the prescribed instrument, generally Form SH-4, must be duly executed and stamped and delivered within the applicable period, along with the relevant share certificate or letter of allotment.
Transfers effected through a depository follow the applicable dematerialised securities process. The parties should confirm which procedure applies to their transaction rather than relying on a generic document checklist.
The company must also follow the applicable registration process and maintain the relevant ownership records.
Tax treatment depends on the seller, buyer, security type, acquisition history, transaction price and other relevant facts.
For a seller, the sale may result in capital gains tax based on the applicable cost of acquisition, transfer consideration, holding period and tax provisions. Stamp duty may apply to the securities transfer under the applicable framework.
Where a non-resident transfers shares, the parties may also need to consider FEMA compliance, pricing rules, tax withholding where applicable and prescribed reporting obligations.
The transaction documents should clearly allocate responsibilities for required filings, payment of applicable duties and the provision of supporting information.
Professional legal and tax advice is particularly important where the transaction involves unlisted shares, related parties, cross-border investors or a complex capital structure.
Consider an Indian SaaS startup with 1,000,000 issued equity shares. Its founder owns 600,000 shares, representing 60% of the company.
A new investor agrees to purchase 50,000 existing shares from the founder at ₹200 per share.
The sale consideration is ₹1 crore.
After the transfer, the founder owns 550,000 shares, or 55% of the company. The new investor owns 50,000 shares, or 5%, assuming there are no other capital changes.
The total number of issued shares remains 1,000,000.
The founder receives the ₹1 crore sale proceeds, subject to applicable costs and taxes. The company does not receive that money.
Before completing the transaction, the parties should confirm whether the founder can sell the shares under the AoA and shareholder agreements, whether any existing investor has a relevant purchase right, and whether the price and transaction structure satisfy applicable requirements.
They should also consider how the new shareholder will be reflected in the company's ownership records and whether the transaction affects any existing contractual rights.
The example illustrates why a secondary sale needs to be assessed as both a financial transaction between the parties and an ownership event for the company.
A cap table records the company's ownership, including the number and class of shares held by each shareholder. Following a completed secondary sale, the seller's holding decreases and the buyer's holding increases.
In a straightforward transfer of existing shares, the total issued share count remains unchanged. The seller's ownership percentage may fall, while the buyer acquires a corresponding percentage.
The company should reconcile the transaction against the relevant agreements, transfer documentation and shareholder records. If the cap table also tracks options, convertible instruments or fully diluted ownership, those figures should be presented separately and updated where necessary.
An inaccurate cap table can create problems during future fundraising, audits and due diligence. Recording a transaction only in a spreadsheet, without reconciling it with the underlying legal records, may leave the company unable to demonstrate the current ownership position confidently.
Six questions to answer before shares change hands.
| ✓ | Whether the sale is permitted under the AoA, shareholder agreements and applicable law. |
| ✓ | Whether any existing shareholder has a right to acquire the shares first. |
| ✓ | Whether the price is supportable under the relevant valuation and tax rules. |
| ✓ | Which agreements, approvals, transfer formalities and regulatory filings are required. |
| ✓ | How taxes, stamp duty and transaction costs will be handled. |
| ✓ | How the completed transaction will be reflected in the company's ownership records. |
These checks are especially important when a secondary sale takes place alongside a funding round, when several shareholders are selling or when the buyer is based outside India.
A secondary share sale in India allows an existing shareholder to transfer ownership and potentially realise liquidity without the company issuing new shares. But the transaction can affect ownership percentages, shareholder rights, tax liabilities and the company's legal and administrative records.
The most reliable approach is to confirm the transfer restrictions, agree on clear commercial terms, assess valuation and regulatory requirements, complete the appropriate transfer formalities and update the company's ownership records.
When handled properly, a secondary sale can support investor exits, founder liquidity and changes in the shareholder base while giving the company a clear record of who owns its shares.
Close every transaction with a clean record. Vestd helps Indian startups update ownership percentages and shareholder details as soon as shares change hands.
Track every change in ownership →