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What are Share Certificates and the process to obtain it?

calendar13 Mar, 2023
timeReading Time: 10 Minutes
What are Share Certificates and the process to obtain it?

Share certificates are issued to purchasing shareholders after a company issues shares in the market. A share certificate is a proof or receipt of the purchase of shares for the purchase and the ownership of shares in a company. Shares certificates document that the purchaser of shares is the registered owner of those shares from a specific date. It essentially transfers the rights and all the duties of a member of the company to any other person who wants to be a member. A share certificate is often issued by a company with a common seal to its members, evidencing the person named in the share certificate has subscribed to certain shares of a company. The Companies Act of 2013 makes it mandatory to issue share certificates within a specified period of time after the incorporation of the company.

Section 2(84) of the Companies Act of 2013 defines shares as “a share in the share capital of a company including stocks”. Section 46 of the Act defines it as a certificate which is issued under the common seal of a company, if any, or signed either by two directors or a director & the Company Secretary, if the company has appointed one, and shall specify the shares that are held by a member. The share certificate shall be the prima facie evidence of the shares that are held by such a member.

Face Value, Book Value & Market Value of Shares

Face value or nominal value of shares which is decided by the company at the time of issuance of shares. It is the value of the common stock of the company and is issued in the initial stages of the offering of shares. It can also be called the original cost of the stock. The face value of shares remains fixed until and unless the company decides to split the shares further. The face value is not affected by fluctuations in the market price. Face value plays a key role as it helps in computing market value, premiums, discounts and the interest on the shares and bonds.

Book Value refers to the value of the company as is understood by referring to its book of accounts, which is reflected through its net worth or its financial statements. It represents the amount for which the company is worth by taking into consideration the assets and liabilities of the company. The book value is helpful in determining whether the stock of a company is overvalued/undervalued, or fairly valued.

The market value is the current price of the stock of a company that is quoted on the Stock Exchange. It is mainly dependent on market conditions and often faces many fluctuations in government policies, global events and macroeconomic data. Market value is essential as it is referred to by investors and market analysts when mentioning the value of a business. The market value is considered the primary parameter, which is used widely to calculate the market cap regards to sales. Market cap is the commonly used welcome bearing similar companies because share prices one more affected by actions like stock splits, bonus among other things.

When are Share Certificates Issued?

Share certificates are issued when the company issues shares to persons who subscribe to its memorandum after its incorporation, and the capital for the shares bought has been paid to the company by its shareholders. The share certificates are required to be issued within two months from the date of incorporation of company. In situations where shares are being transferred, the share certificates are required to be issued within a period of a month from the date on which the instrument of transfer was received.

In case a share certificate that was issued previously ends up getting lost or destroyed, or if it is surrendered by the company or if it ends up being damaged in any other way, a duplicate share certificate shall be issued in accordance with Rule 6 of the Companies (Shares and Capital) Debentures Rules of 2014. The company secretary shall maintain all the renewed or duplicate share certificates. The shares must be issued within three months of the date on which all the documents are submitted.

In accordance with Rule 5(2) of the Companies (Share Capital and Debentures) Rules of 2014, a share certificate must be issued in Form SH-1. Although the rules provide enough flexibility to companies to use their own format, it should somewhat resemble Form SH-1 and contain the below-mentioned details:

  • The name of the person for whom it is being issued.
  • The amount of each share
  • The related shares

Signatories of a Share Certificate

Rule 5 (3) of the Companies (Share Capital & Debentures) Rules of 2014 states that a share certificate shall be issued only after it is signed by the below mentioned signatories:

  • Two Directors of the company that have been authorised duly by the board of directors of the company for the purpose of issue of shares or by the allotment committee of the board, if the committee has been authorised by the board of directors, and
  • The company secretary or any other person who has been authorised duly by the board of directors for this purpose.

Where the company issuing shares does not have a common seal, a share certificate shall be signed either by two directors or by a director & the company secretary if the company has appointed one. Where the composition of the board of directors permits, at least one of the above mentioned two directors shall be any person other than the whole time director or the managing director of the company.

If the company is a one-person company which has a common seal, the share certificate is required to be signed by the director along with the company secretary or any other person that may be appointed for this purpose by the board of directors.

Details in a Share Certificate

The below mentioned details are required to be provided in a share certificate:

  • Name of the issuing company
  • Corporate identity number or CIN
  • Address of the company’s registered office
  • Nominal value per share
  • Amount paid up per share
  • Folio number of the member
  • Certificate number
  • Number of shares that are represented by the share certificate
  • Name of the holder of shares, including the joint holders of shares
  • Number of shares held in number and in words
  • Date of issue of the share certificate
  • Signature of directors and the company secretary or any other authorised persons

What are the Pre-Conditions for Issuing Share Certificates?

  • There are certain conditions that are required to be fulfilled before the share certificate are issued. The below mentioned conditions are needed to be fulfilled before the share certificate is issued to the new allottees:
  1. The board of directors must authorise the issue of share certificates by passing a board resolution.
  2. A share certificate shall be issued only when the letter of allotment or fractional coupon of appropriate value is surrendered.

What are the Pre-Conditions for Issuing Share Certificates?

  1. There are certain conditions that are required to be fulfilled before the share certificate are issued. The below mentioned conditions are needed to be fulfilled before the share certificate is issued to the new allottees:
  2. The board of directors must authorise the issue of share certificates by passing a board resolution.
  3. A share certificate shall be issued only when the letter of allotment or fractional coupon of appropriate value is surrendered.
  • Where the share certificate is lost, a duplicate share certificate is required to be issued only after following the below mentioned conditions:
  1. Consent of the board of directors is required to be taken, and a resolution to issue duplicate certificates must be passed
  2. With or without payment of a fee which shall not exceed ₹50
  3. On terms that may be found reasonable, like furnishing a copy of the FIR that has been launched with the police as supporting evidence.
  4. Promise by the applicant that she shall indemnify the company in case there is any loss that is sustained on account of the lost share certificate and to return the same if it is discovered later.
  5. In case an investigation is conducted to trace the lost certificate, any payment in that regard incurred by the company shall be considered an out of pocket expense which shall be paid by the applicant.
  6. A duplicate share certificate shall be issued by clearly mentioning that the certificate is a duplicate which has been issued in lieu of the lost share certificate.

Particulars of the duplicate share certificates issued shall be entered in the register of renewed and duplicate share certificates as provided under Form Number SH-2, providing details of the name of the person to whom the certificate has been issued, the number of the share certificate and the date of issue of share certificate in lieu of which the duplicate certificate has been issued. Necessary changes shall also be made in the Register of Members in the “Remarks” column through suitable cross referencing. The Register of Renewed and Duplicate Certificates shall be kept at the registered office of the company or any other place where the register of members has been kept and shall be kept permanently in the company secretary’s custody or any other person authorised by the board.

Every change that is made in the Register of Renewed and Duplicate Share Certificates must be duly authenticated by the company secretary or any other person who has been authorised by the board of directors for the purposes of sealing the share certificate and signing it.

Time Frame to Issue Share Certificates

As per Section 54(3) of the Companies Act of 2013, in case of an allotment or transfer, the company is required to deliver the share certificates in the below mentioned manner:

  • When shares are being allotted, then the share certificates must be delivered within two months from the date of allotment
  • If the members are subscribed to the Memorandum of Association of the company, then the share certificates must be issued within two months from the date of incorporation of the company
  • where the shares are transferred, then the share certificates must be issued before the expiry of one month from the date of receipt of the instrument of transfer, along with the relevant documents
  • where there is a transmission of shares, the share certificate is required to be issued within one month

The time frame for issuing a duplicate share certificate shall be in the below mentioned manner:

  • For a listed company, the duplicate share certificate must be issued before the expiry of 45 days from the date of submission of all the relevant documents
  • For an unlisted company, the duplicate share certificate shall be issued before the expiry of 3 months from the date of submission of all the relevant documents.

The time frame for safekeeping and preserving the share certificates shall be in the below mentioned manner:

  • All printed blank share certificates must be held safely for a period of 3 years.
  • In situations of disputed cases, the share certificates must be kept permanently till the company is in existence
  • all the surrender share certificates must immediately be defaced or stamped or printed in bold letters as cancelled and must be destroyed after the expiry of a period of 3 years from the date on which the certificate was surrendered. The surrender of share certificates shall be under the authority of the board of directors and shall be facilitated by passing a board resolution.

Procedure to Issue Share Certificates

The below mentioned procedure is required to be followed the issue share certificates in accordance with the Companies Act 2013:

  • Board Meeting and Allotment of Shares

A meeting of the Board of Directors must be conducted in order to form a small committee of directors to decide upon the allotment of shares. The committee formed for this purpose shall be called the Allotment Committee. The committee shall then decide upon share allotment and then submit the report to the board of directors.

If the Board of Directors approves the board report, then it will pass a resolution to allow the shares to the applicant. Rule 5 makes the passing of a board resolution mandatory before the issuance of shares.

  • Delivery of Letter of Allotment

Once the board of directors have passed the board resolution for the allotment of shares, a letter of allotment shall be dispatched to all the concerned members. The allotment letter shall contain information pertaining to the number of shares that have been allotted to an individual. In accordance with Rule 5, share certificates can only be issued after a board resolution is passed and a letter of allotment or fractional coupons are surrendered to the company.

  • Preparing Share Certificate

All the share certificates that are to be issued must be prepared in accordance with Form SH-1. All securities of unregistered public companies shall be issued in dematerialised form. The share certificate must be signed either by two directors of the company or by a director and a company secretary if the company has appointed one. If there is a common seal for the company, it is required to be fixed on the signatures of the person’s signing the certificate.

Once the shares have been allotted, an entry must be made in the register of members under Form MGT-1 must be made before the expiry of 7 days from the date of allotment. The entries made in the register, as mentioned above, must be authorised by the company secretary or any other authorised person. Requisite stamp duty that is applicable in rates and provisions of the Stamp Act of the relevant state where the registered office of the company is situated must also be included.

After the share certificates have been prepared in the manner mentioned above, a board resolution shall be passed by the board of directors to issue the share certificates.

  • Intimation and Dispatch of Share Certificates

Either the director or the company secretary shall inform the shareholders that the share certificates are ready to be issued and which will be delivered in exchange for the letters of allotment and once the bankers confirm payment of the allotment money. Public notice must also be served first as general information for all the members of the company. All members who surrender their letters of allotment to the company shall receive the share certificates within the time frame as mentioned above.

Maintenance of Share Certificates Forms

Rule 7 of the Companies (Share Capital and Debentures) Rules of 2014 states that blank forms that are to be used to issue share certificates must be printed, and the printing shall take place only with the expressed authority board resolution that has been passed by the board of directors of the company and the blank form shall be kept the custody of the company secretary or any other person whom the board of directors may authorise for this very purpose. The company secretary or any other person authorised by the board of directors will be responsible for providing an account of these forms to the board of directors.

The below mentioned shall be responsible for the preservation, maintenance and safe custody of all the documents and books in relation to the issue of share certificates along with the blank forms of shares certificates:

  • The committee of the board of directors, if it has been authorised by the board or if the company has a company secretary, then such company secretary.
  • In case the company has no company secretary, any director of the company who has been authorised by the board of directors for this very purpose.

Rule 7 also states that books of accounts and documents in relation to the issue of shares certificates must be preserved for a period of not less than 30 years in good order. In situations of disputed cases, the books and documents shall be kept permanently in every certificate that has been surrendered to the company and shall be defaced immediately either by printing the word cancelled in bold letters or stamping, and it may be destroyed after a period of 3 years from the date on which it was surrendered. All of this shall be done after passing a board resolution by the board of directors and in the presence of a person who has been duly authorised by the board in this regard.

Penalty for any Breach in Issuing Share Certificates

A company that defaults to complying with the provisions of the Companies Act of 2013 and the Companies (Share Capital and Debentures) Rules of 2014 with respect to the issue of share certificates, the company shall be liable to be punished with a fine that shall not be less than ₹25,000 but that extend up to ₹5 lakh. Every officer of the company involved in any default with respect to the issue of shares shall be liable to be fined for an amount which is not less than ₹10,000 but could extend up to ₹1 lakh.

Conclusion

Issuing of share certificates is a mandate that is required to be followed by every company after its incorporation as is provided under the Companies Act of 2013. A share certificate is a proof or receipt of the purchase of shares for the purchase and the ownership of shares in a company. It essentially transfers the rights and the duties of a member of the company to any other person who wants to be a member and shall be the prima facie evidence of the shares that are held by such a member. The Companies Act[1] and the Companies (Share Capital and Debentures) Rules of 2014 lay down the manner, form and procedure of issuing share certificates. It is imperative for companies to comply with the provisions laid down under the law with respect to the issue of share certificates in order to avoid incurring penalties for both the company and the concerned officer in charge of the issue of share certificates.

Read our Article:Companies (Appointment And Remuneration Of Managerial Personnel) Amendment Rules 2023

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