What is a Share Certificate?

The Indian share market has become a preferred investment avenue for investors who want to trade daily or invest systematically for the long term. With the advent of investing technologies and the resulting digital trading platforms, there is an unprecedented increase in trading volume.

This increase in the trading volume is also a reminder that the company that issues the shares has to keep track of all its shareholders as they are the part-owners of the company. However, as investors buy and sell shares regularly, it all comes down to companies issuing share certificates to ensure they keep track of the current shareholders.

What is a Share Certificate?

A Share Certificate is a written, legal document that is issued and signed on behalf of a company that wants to indicate the owners of its issuing shares. Once a company issues share certificates, it becomes documented proof of a shareholder’s shareholding in the company.

The company can issue a share certificate in physical or electronic form, the latter being the preferred choice as the investing process has shifted to digital platforms. When a company issues a share certificate, it details the number of shares and the price at which they were bought. However, the share certificate contains details of the ownership and is not the stock itself.

Understanding Share Certificates’ Meaning

Suppose you go to a shop to buy a mobile phone. Once you have paid the cost price of the mobile to the shop, you become the owner of the mobile phone. However, in the eyes of the law, you would need a bill that contains the details of the mobile, such as the model, colour, specifications and the final paid amount. Once the shop issues you the bill, you can present it to the mobile company, in any event, to mark yourself as the owner. The same is the case with share certificates.

As the shares you buy are assets that have financial value, making you part owner of the company, SEBI has mandated that every company must issue a share certificate to every investor who buys its shares. This is to ensure that the company and the relevant authorities have the information about the shareholders stretching to how much ownership they have.

When the Indian stock market followed the open outcry system, where shares were bought physically by being present at the stock exchange, companies used to issue Share Certificate to the buyer. These share certificates were the only way the company and the shareholders could keep track of the transactions.

However, as the physical share certificates had no means to be tracked, shareholders could pass the share certificates to someone else without notifying the company. Now, as almost every transaction in the Indian share market takes place digitally, the share certificates are rarely issued physically and have shifted to digital share certificates.

When a company issues a share certificate, it contains the following information about the transaction:

• Name of the company and its registration number
• Corporate Identification Number (CIN no.)
• Address of the company’s registered office
• Name of the shareholder
• Folio number of the shareholder
• Number of shares bought by the shareholder
• The amount paid by the shareholder to buy the specified number of shares
• Issue date of shares
• Class of shares

When does a company issue share certificates?

The Securities and Exchange Board of India has mandated companies registered in India to issue the share certificates within two months of its incorporation. If the company issues additional shares to existing or new shareholders, the company must issue share certificates within two months from the original allotment dates of such shares. If the case pertains to share transfer, the company should issue share certificates to transferees within one month of receipt of the instrument of transfer by such company.

Procedures for issuing Share Certificates

Being one of the most important documents in the process of investing, a company takes utmost care in issuing share certificates to the shareholders. The companies follow an extensive procedure of issuing share certificates, as listed below:

• Allotment of shares:

  This is where they decide the allotment of shares to various shareholders. The company calls a board meeting for deciding the prospects of share allotment and constitutes a committee known as the allotment committee. The allotment committee prepares a report which is then approved by the board.

  After approval, a resolution is passed for allotting shares to the respective applicants. Once the shares are allotted to the applicants, the company secretary sends the letters of allotment to the applicants containing the details of the share allotment. The letter of allotment is considered as the share certificate till the final share certificate is issued.

• Register of Members:

  After the letter of allotment is issued, the company secretary prepares a Register of Members. The Register of Members ensures that the company has information regarding the share allotment and the shareholders which are created from the list of applicants received and the allotment sheets.

• Preparation of the share certificates:

  The next step is to arrange the form of share certificates as suggested by the Articles of Association. After the preparation, the company secretary gets the form printed together and fills in all the relevant information in the share certificate as per the application register and allotment sheets.

  The share certificate is then signed by two of the directors of the company and the company secretary with the company’s revenue stamp and seal affixed. Once all the share certificates are prepared, the company calls a board meeting to pass the resolution of issuing the final share certificates.

• Intimation and Dispatch:

  The last step is to inform all the shareholders about the preparation of the share certificates and the delivery in exchange for the previously issued letters of allotment and the baker’s receipt. Once the shareholders surrender their letters of allotment, they are provided with the share certificates, which they can collect from the company’s registered office.

Advantages and Disadvantages of issuing a Share Certificate

The issuance of share certificates allows companies to keep track of their shareholders, which is needed when the company calls a board meeting or distributes dividends. Furthermore, it also brings transparency in the process of investing as the share certificates contain all the important details about the transactions. However, a major disadvantage is the tedious clerical work which demands time and money on the company’s part.

In the process of issuing share certificates, the company usually needs an entire team of employees to manage the process and ensure the share certificates comply with the governing law. In case the share certificates are physically issued, they can get lost or stolen, forcing the company to repeat the process of issuing share certificates to the shareholders.

Conclusion

Today rarely does any investor demand share certificates in physical form. However, it does not mean that the company does not have to issue a share certificate. If not in physical form, the company has to issue an electronic share certificate that also follows the same issuance procedure. However, the share certificate is sent to the shareholder over email.

If any company fails to comply with the share certificate provisions as mandated by SEBI, it can be fined a minimum amount of Rs 25,000 that could be extended to Rs 5,00,000. Furthermore, the defaulting officer can also be fined a minimum amount of Rs 10,000 and a maximum amount of Rs 1,00,000.

Thus, this answers the question of what is a share certificate. Now you know that you are entitled to a share certificate as the shareholder of a company which makes up for an important investing document.