What are Share Certificates, its Importance and Procedure?
Share certificate is a document containing information about the shareholder and the number of shares issued to them on a particular date. It is issued in physical or electronic form to the shareholders. Read on to understand what a share certificate is and different aspects of the same.
It is a legal written document issued by companies to their shareholders. This certificate serves as ownership proof for shareholders certifying that they own a particular number of shares.
However, it should be noted that a share certificate only contains shareholders’ details and the number of shares they own. It does not represent the value of the shares owned. There are different certificates depending on the asset classes, and companies issue multiple certificates to their shareholders if they own shares of different asset grouping.
Every company incorporates intricate designs on certificates issued by them in order to restrict any fraudulent activity. Now that you are aware of the meaning of share certificates, let’s shift our focus to its different aspects.
One of the main purposes of share certificates is the documentation of every shareholder. It helps companies maintain a list of the names of genuine shareholders and weed out the ingenuine ones from their ecosystem.
Companies need to regularly update all the details on this certificate as per changes occurring in the ownership of shares. For example, suppose an investor purchases 200 shares of one company. He sells 50 shares after a few weeks. Later, he decides to purchase another 100 shares of the same company. Every transaction must be clearly reflected in these certificates. It helps in the auditing and reconciliation processes.
Companies mostly issue a share certificate in three situations. These scenarios include issuance of fresh shares and consequent subscription of the same. Moreover, when there is a horizontal or vertical transfer of shares between shareholders, issuance of share certificates is mandatory.
Furthermore, existing shareholders can also apply for fresh certificates in case of loss or damage occurring to their certificates. Therefore, we see that a stock certificate serves multiple purposes for both shareholders and companies.
The share certificate format is different for every company. As per regulations of the Registrar of Companies in India, a company is eligible to issue a share certificate within 2 months of its incorporation.
In case of the new issue of shares to existing or fresh investors, a company must issue this certificate within a span of 2 months from the date of allotment of such shares.
Whereas in case of transfer of shares, the company must issue a stock certificate in a proper format to transferees within one month of receipt of the transfer instrument from the entities involved.
Here are some of the details that are provided in a share certificate:
- Name of the company issuing the share
- The registered address of the firm
- Full name of the respective shareholder
- Corporate identification number (CIN) of the company
- Folio number of the shareholder
- The number of shares bought by the individual
- The distinction between the number of shares bought
- Amount that the individual has spent to purchase the shares
Here are some important steps that companies follow while issuing shares:
• Call a Board Meeting
The first step entails calling a board meeting where concerned members would deliberate on fresh allotment of shares. The company’s board would appoint a share allotment committee that would look into all-important affairs related to the allotment.
It will prepare a report and submit the same to the board. After that, the board would approve the report and issue fresh shares to investors. Once individuals have received approval for share subscription, they will receive a letter from the company secretary intimating them about issuance of shares.
This letter would serve as an interim share certificate until the company releases final certificates.
• Registration of Members
Thereafter, the company will prepare a register which will contain all information about the shareholder and the number of shares held by them. It will also contain the amount that shareholders paid for the issuance of shares.
• Printing the Certificates
Under this step, the company secretary will prepare the stock certificate format according to the format mentioned in the Articles of Association (AOA) of the company. He/she must carefully fill out this certificate with all requisite information.
Moreover, it is the duty of the respective company secretary to ensure that at least two Directors sign each stock certificate. As per law, the company secretary must also sign the share certificate. Apart from all this, all certificates must have a company stamp.
The last step involves intimation by the company secretary to respective shareholders that their certificates have been dispatched. It can be either via a phone call, SMS, or official mail id of the secretary.
Local shareholders also have the provision to collect their certificates from the local registered office of the company.
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Here are some steps that you need to follow if you wish to get a duplicate share certificate:
Step 1: File an FIR with the local police station about theft or loss of stock certificate. You should keep a copy of the FIR with you for future requirements.
Step 2: Write an application to the company informing them about loss or theft of the original share certificate. Do not forget to attach a copy of the FIR with this application.
Step 3: You must issue an indemnity bond amounting to Rs. 200 to the company, in which you accept that you will bear the cost of a duplicate share certificate.
Step 4: The board of directors may approve or reject the application based on merit.
Step 5: If the company approves your request, there will be a window of 15 days where it will entertain any objection in relation to the grant of duplicate certificates to the applicant. In case there is no objection, the company will issue duplicate certificates to the same.
The duplicate share certificate format will be identical to the original format.
Here are some benefits of issuing a share certificate:
- As it serves as an entitlement of dividends, investors can use it for financial planning to get an idea about their effective rate of return.
- It serves as proof that you own a particular quantity of shares of a company as on said date.
- Companies can keep track of genuine shareholders and use the same for the efficient distribution of dividends.
Some disadvantages of this certificate are as follows:
- It is a tedious process that requires a huge amount of time and resources. Issuance of paper certificates leads to additional costs for the company.
- It is a mere acknowledgement that you own a certain number of shares in the company. These certificates do not have any liquidity attached to them.
- Another drawback associated with these certificates is that shareholders can pass them to other individuals without intimating the company. This means companies will have to keep track of all such transfers, and this burdens them with additional back-office work.
What are the Penalties for Breach in Issuance of Certificates?
As per provisions mentioned in the Companies Act 2013, every company must issue shares or stock certificates within the prescribed time frame. Any delay on the part of companies to issue these certificates will lead to penalties.
In case of non-issuance of share certificates, a company can be punishable with a fine not less than Rs.25,000, which can extend up to Rs.5,00,000. Furthermore, the defaulting officers may be punishable with a fine of not less than Rs.10,000, which may extend up to Rs.1,00,000.
Here are some points that you should know about this certificate:
- Share certificates can be either in bearer or registered format
- The bearer share certificate serves as a document guaranteeing all legal rights related to that stock
- Here’s an interesting fact. Scripophily is the collection and preservation of old specimens of share certificates
Final Word
A share certificateis an important legal document that establishes proof of ownership of a stock. There are several benefits of share certificates that accrue to both investors as well as the company, thereby making it an effective administration tool.
Ans: Shares issued to investors by manual book entry without any physical or electronic document are uncertified shares. On the other hand, shares allotted in a document or in PDF format are certified shares.
Ans: Firms generally prefer online or electronic share certificates due to several benefits that come with them. These include easy tracking and documentation in case of changes occurring in the shareholding pattern. The digital certificates also come with low stationery and courier charges for the company.
Ans: Every stock certificate must be signed by at least two directors of the company. When only one director is present, the signature of this director, along with the signature of the company secretary, is necessary.
Companies having only a single director and no company secretary require signature of the director in the presence of a legal witness who also signs the certificate.
Ans: Yes, you can download your share certificate after logging in to the shareholders’ portal of the respective company’s website. However, you can download them only after these are digitally signed by concerned authorities.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
