Introduction to Share Certificate: Meaning, Object and Effects

Introduction:

A share certificate also known as a stock certificate is essentially a document issued by a corporation that serves as a legal document of ownership of the number of shares, a shareholder receives said share certificate as proof of ownership and as a receipt of his purchase of a particular number of shares.

A company issues share certificates under the mandate of the Companies Act,2013(subjected to various amendments). The Companies (Issue of Share Certificates) Rules 1960 underlines provisions in adherence to which share certificates must be issued.

According to Section 46 of the Companies Act 2013, a share certificate is a legal document, duly stamped with the company seal and revenue stamps, signed by at least two directors and the company secretary serves as the title of ownership of the distinct number of shares mentioned in the said share certificate.

Under UK law, the Companies Act 2006, makes it mandatory for a company must issue a share certificate within two months of issue or transfer of shares takes place, a single share certificate is issued generally for both issue and transfer, although separate certificates may be provided if the shareholder specifically asks for it.

Types of Share Certificates

• Registered form: these types of certificates are more commonly used and serve as the only evidence of ownership to the particular stock.
• Bearer form: this form of certificate is uncommon now and bestows upon the holder of the certificate, all legal rights associated with that particular stock.

Timeframe for issuing Share Certificates

• After incorporation: Within two months.
• Allotment of new shares: Within two months after allotment.
• Share transfers: Within two months after the transfer

The information included in a Share Certificate

• The number of the certificate.
• Name of the issuing company.
• CIN (Corporate Identification Number) of said company.
• Address of the registered office of the company.
• Number of shares owned and represented by the certificate (in both numerical and word form)
• Folio number of shareholders.
• Amount paid for said shares.
• Issue date of shares.
• Class of shares.
• Contact details of the owner of said shares.
• In the case of limited companies, a company seal is also included.

Key Terms

• Class of Shares: Refer to the differentiation of shares in accordance with the level of voting rights received by the shareholders.
• Company Seal: Also known as the Corporate Seal, is an official seal of the company, used to sign/seal documents in the name of the company signifying their legal assent to a document usually used in the case of documents executed as a deed or in other specific documents like share certificates.
• CIN (Corporate Identification Number): CIN is a 21- digit unique alpha-numeric corporate identification code assigned by the Registrar of Companies under the Ministry of Corporate Affairs.

[In case of loss of the original certificate or any form of damage is sustained by it, a duplicate share certificate may be issued by the issuing company and the same must be filled in congruency to the original share certificate]

Issuing physical/paper share certificates can be a difficult task, which gets more complicated due to maintenance and circulation of the shame.

Disadvantages of issuing a paper Share Certificate

• It involves investment in terms of time, money, and labour.
• The amount of clerical work involved in the maintenance of the certificate issuing system is immense.
• There is exists no mechanism to avoid the transfer of certificates between shareholders without prior notice to the issuing company
• Documentation, verification and making relevant entries in legal documents represent a huge amount of time and effort on part of the issuing company.
• The process of replacement of lost share certificates through issuing duplicate certificates is a tedious one.

Procedure to be followed for issuing a Share Certificate

• A board meeting regarding the allotment of shares is conducted.
• The Company Registrar prepares a members list from application and allotment lists.
• The secretary must arrange the form of the share certificate in accordance with the articles of association.
• The share certificate is then signed by at least two directors and the secretary and must include the company and relevant revenue stamps.
• A board meeting is then called for passing a resolution for issuing of the prepared share certificates.

Penalty for violating issuance Provisions

• The company will have to pay a fine not less than Rs 25000 which may extend up to Rs 500000.
• Every defaulting member of said company will be subject to a fine not less than Rs 10000 which may extend up to Rs 100000.

Legal Provisions governing the act of issuing of Share of Certificates

• If a share is purchased and maintained in depository form, the record of the said depository will be treated as proof of the beneficial owner’s interest.
• If a company fails to comply with the existing provisions relating to issuing of share certificate, the company will be penalized by way of fines which will not be less than five times the face value of shares mentioned in the share certificate and may be increased to ten times the face value of said shares, whilst any member of the firm whether directly or indirectly involved in the process of issuing of share certificates shall have legal exposure under section 477 of the Companies Act, 2013

Definition, meaning and scope of section 447

This section underlines punitive measures in case of fraud and covers the actual definition of fraud.

Without any pre-existing prejudice, any person found guilty of fraud [for an amount not less than 10 lakhs or 1% of a company’s turnover whichever is lower in the case][1]  shall be charged with imprisonment for at least 6 months which may extend to ten years accompanied with a fine equal to the amount of money involved in the act of fraud and may extend up to three times the said amount.

Elements of Fraud

• Fraud in relation to business or corporate affairs, including an act, omission, concealment, or abuse of powers from a position of strength with the intention to defraud, make undue gains and hamper or undermine the interests of the company, shareholders or any other party involved, regardless of the fact whether there is a wrongful gain or loss made.
• Wrongful gain means any gain made from unlawful or illegal property
• Wrongful loss means any losses incurred from the unlawful or illegal property[2].

Case: Charanjit Singh Ghumman vs Dr Reddy’s Laboratories Ltd[3].

This was a petition originally filed under Section 111(4) of the Companies Act to enforce the following: –

• Correction of the register of members in favour of petitioner.
• Cancellation of duplicate certificates.
• Issuing of fresh certificate in favour of petitioner.
• Paying past dividends
• Granting penal damages for loss of profit and mental agony suffered by petitioner.

Facts of the case

The petitioner held 100 equity shares in the defendant company, these shares were to be transferred in favour of the second respondent with the company for effecting transfer of shares in favour of the petitioner. The company claimed that the original share certificates were taken before the said transfer took place, and hence they issued duplicate certificates in accordance with the provisions under section 46 of the Companies Act, 2013. However, the petitioner denied making any sale of shares and taking some for consideration for it.

Judgement

It was held that non-compliance with the provisions for issuing of duplicate shares did not call for an investigation into the internal affairs of a company and such an investigation cannot merely be based on conjecture or minor default on part of the company and must be substantiated with hard evidence indicating both intents to fraud and proof of the fraudulent activity itself, the company had taken enormous precaution in the matter of registration of transfer of the shares and whatever the company did was with the knowledge and consent of the petitioner as has been elaborated earlier. Hence the petition stood dismissed with no order to costs.

Conclusion

The share certificate by virtue of its existence serves as a legal document and title to a distinct number of shares mentioned on it. Both the certificate and the register of members are taken into consideration together to avoid discrepancies and ensure consistency, after extensive board meetings and signatures of at least two directors and the company secretary, share certificates are issued. There exist provisions to protect the interests of the shareholders and to penalize companies through the way of fines and prosecution. The Indian Companies Act mandates the issuing of share certificates to get on the record proof of transactions involving the purchase and sale of securities.

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References:

1.Inserted by The Companies (Amendment)Act,2017 :- Amendment effective from 9th February 2018

[2] Section 447, Companies Act 2013, Constitution of India

[3] Charanjit Singh Ghumman vs Dr. Reddy’s Laboratories Ltd 1999 97 Comp Cas 360 CLB

Other Sources:

• http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17890
• https://indiankanoon.org/doc/1254704/
• https://cleartax.in/s/share-certificate
• https://www.investopedia.com/terms/s/share-certificate.asp
• https://www.indiafilings.com/learn/company-share-certificate/