Share Certificates: Meaning, Procedures & Advantages

Introduction

In the Indian context, share certificates play a crucial role in the corporate landscape. They are legal documents that provide evidence of ownership in a company and represent the shares held by shareholders. Share certificates serve as proof of ownership and are essential for various purposes, such as transferring ownership, raising capital, and maintaining transparency in corporate governance.

In this article, we will delve into the details of share certificates, including their definition, procedures for issuing them, the information they contain, advantages and disadvantages of issuing them, how to obtain a duplicate certificate, and some essential points to know about them.

Content defining share certificates.

Share certificates are official documents issued by a company to its shareholders, confirming their ownership of shares in the company. These certificates are typically printed on special paper and contain important details regarding the shares, such as the shareholder’s name, the number of shares owned, the class of shares, and any restrictions or conditions associated with the shares.

They are an integral part of the shareholding structure of a company. They are used for various purposes, including transferring ownership, pledging shares as collateral, and participating in company meetings and voting

What is Share Certificate ?

A share certificate, also known as a stock certificate, is a documented proof of shareholding in a company. It can be a physical document or an electronic one, issued to a shareholder and signed on behalf of the corporation. This certificate is legal proof of ownership of a certain number of company shares. It certifies registered share ownership of a certain number of shares from the grant date and also acts as a receipt of share purchase. However, a share certificate merely contains details of the shareholder and the number of shares they own, it is not the stock itself.

Share certificates are issued based on asset classes. Usually, one certificate is issued to each shareholder containing details of the total number of shares of a particular asset class. Multiple certificates are issued only in case of shareholdings across both asset classes A & B. A company must issue a share certificate within two months from the date of the issue or transfer of shares. Similar to currency notes, companies use intricate designs in their paper stock certificates to restrict fraudulent replications.

Procedures for issuing share certificates.

The issuance of share certificates involves specific procedures to ensure accuracy and compliance with legal requirements. The steps involved in issuing share certificates are as follows:

• Share allotment: The company must allot the shares to the shareholders before issuing share certificates. This typically involves the board of directors approving the allotment and recording it in the minutes of the board meeting.
• Preparation of share certificates: Once the shares are allotted, the company prepares the share certificates. These certificates are often printed on pre-printed stationery with security features to prevent counterfeiting.
• Filling in the details: The company fills in the relevant information in the share certificates, including the shareholder’s name, the number of shares allotted, and other necessary details.
• Signature and seal: The share certificates are signed by authorized signatories, such as directors or company secretaries, and affixed with the company’s seal.
• Delivery to shareholders: The completed share certificates are delivered to the respective shareholders in person or through registered post. The shareholders should safely store their share certificates as they are valuable documents.

When does a company issue share certificate?

A company issues share certificates in various situations, including:

• Incorporation: When a new company is incorporated, it issues share certificates to its initial shareholders who have subscribed to the company’s shares.
• Allotment of shares: When a company raises capital through the issue of new shares, it issues share certificates to the subscribers of those shares.
• Transfer of shares: When shares are transferred from one shareholder to another, the company issues new share certificates reflecting the change in ownership.
• Bonus shares: If a company issues bonus shares to its existing shareholders, it provides them with new certificates representing the additional shares.

Details provided in share certificates.

Share certificates contain several details essential for identifying and verifying the ownership of shares. The necessary information provided in share certificates includes:

• Shareholder’s name: The name of the shareholder who owns the shares.
• Company details: The name and registered office address of the company issuing the shares.
• Shareholder’s address: The shareholder’s address as recorded in the company’s register of members.
• Share details: The number of shares held by the shareholder, the class of shares, and their nominal value.
• Share certificate number: A unique identification number assigned to the share certificate.
• Issue date: The date on which the share certificate is issued.
• Authorized signatories: The signatures of official company representatives, such as directors or company secretaries.

Shareholders need to review the details on their share certificates and notify the company if there are any discrepancies.

Advantages of issuing a share certificate

Issuing share certificates offers several advantages for both companies and shareholders:

• Legal proof of ownership: Share certificates provide legal evidence of ownership in a company, protecting the shareholders’ interests and rights.
• Transfer of ownership: Share certificates facilitate the transfer of ownership from one shareholder to another. The transfer process involves endorsing the share certificate and updating the company’s register of members.
• Shareholder rights: Share certificates enable shareholders to exercise their rights, such as voting at general meetings, receiving dividends, and participating in the company’s decision-making processes.
• Transparency and accountability: Share certificates help maintain transparency and accountability in corporate governance by clearly identifying the shareholders and their shareholdings.

Disadvantages of issuing a share certificate

While share certificates offer various benefits, they also come with certain disadvantages:

• Administrative burden: Issuing and maintaining share certificates require organizational efforts and resources, especially for companies with many shareholders.
• Potential for loss or damage: Share certificates are physical documents that can be lost, stolen, or damaged. In such cases, shareholders may face challenges in proving their ownership.
• Delays in share transfer: The transfer of shares involving physical share certificates may take longer than electronic transfers, which can be done quickly through dematerialized securities.
• Cost implications: Printing and distributing physical share certificates can be costly for companies, particularly if they have a large shareholder base.

How to get a duplicate share certificate?

In case a shareholder loses or damages their share certificate, they can obtain a duplicate certificate by following these steps:

• Notify the company: The shareholder should inform the company about the loss or damage of the original share certificate and provide the necessary details, such as the share certificate number and the number of shares held.
• Apply: The shareholder needs to submit a written application to the company requesting a duplicate share certificate. The application should include relevant details and supporting documents, such as an indemnity bond and an affidavit.
• Verification and approval: The company verifies the shareholder’s request and supporting documents. Once approved, the company proceeds with issuing a duplicate share certificate.
• Surrender of an indemnity bond: The shareholder may be required to execute an indemnity bond, indemnifying the company against any losses arising from the duplicate share certificate.
• Issue of a duplicate share certificate: Upon completing the necessary formalities and paying any applicable fees, the company issues the same share certificate to the shareholder.

What are some points to know about share certificates?

Here are few essential points to know about share certificates in the Indian context:

• Mandatory for certain transactions: Share certificates are required for specific transactions, such as selling shares, pledging shares as collateral, or transferring shares to another person.
• Different classes of shares: Share certificates may indicate other types of shares, such as equity shares, preference shares, or debentures. Each class of shares has special rights and privileges.
• Dematerialized form: With the introduction of dematerialized securities, shareholders can hold shares electronically through a depository participant. In such cases, there is no physical share certificate issued.
• Validity period: Share certificates typically have a validity period mentioned on them. Ensuring that the certificates are still valid and not expired is essential.
• Register of members: The company maintains a register of members, which is a record of all shareholders and their shareholdings. The share certificates correspond to the entries in this register.
• Legal significance: Share certificates have legal significance and can be used as evidence in legal proceedings relating to ownership or shareholder disputes.

Conclusion

Share certificates serve as essential documents in the Indian corporate context, providing proof of ownership and representing shares held by shareholders. They are crucial in facilitating transactions, ensuring transparency, and protecting shareholders’ rights.

In this article, we discussed the definition and details of share certificates, procedures for issuing them, advantages and disadvantages of issuing share certificates, obtaining a duplicate certificate, and essential points to know about them. Shareholders should understand the significance of share certificates and keep them safe to safeguard their ownership rights in a company.