Section 2(84) of the Companies Act, 2013 defines shares, are the divided capital of the company.[i] The shareholding a person has in the company is their ownership in the company. A company releases shares in order to gain capital for the operations of the company, shares are some part of ownership within the company. Depending on the shares that a person buys, they might have some amount of rights to the profit earned by the company created by the shares they have invested in. The person who has invested in the shares of a company is called a shareholder of the company. This paper will understand share certificates and also look at its particulars.
A company is only allowed to issue as many shares as is allowed by the company’s articles of association and memorandum of association, which has been submitted to the Registrar and has been approved by him. Moreover, other than this, the company also needs to follow all relevant provisions within the Companies Act, of 2013.
There are 2 types of shares[ii]
- Preference shares: these shares carry within them the right of payment of dividends, which is an amount that may be fixed or not, and also the right of repayment in case the company is winding up.[iii]
- Equity shares: these are shares which are not preference shares.[iv] Depending on the type of equity shares, the shareholder may have differential rights or voting rights or both. These shareholders don’t have a fixed right to dividends, it is decided on a year-to-year basis.
There are different kinds of share capital:
- Authorized share capital
This is the maximum amount of shares a company is allowed to issue. This includes all types of shares a company is allowed to issue. This is envisaged in the memorandum of association and thus, they cannot issue more shares than this. Unless a special resolution is passed to amend the authorized share capital in the memorandum of association.
- Issued share capital
These are the shares out of the authorized share capital which has actually been issued by the company for capital.
- Subscribed share capital
These are the shares which have been subscribed to out of the issued shares.
- Called-up capital
At any point, the company can ask people to not pay the full price of their shares, and only pay a portion of the price. And at a later point ask them to pay the rest of the money owed to the company.
The shares which have been called for and paid are called called-up capital.
The shares which have not been called for yet are called uncalled capital.
- Paid-up share capital
These are shares which were called for and then paid by the shareholders.
When payment is called for and the payment isn’t made, this situation is called a “Call for arrears.”
When someone buys shares in the company, they are given a share certificate to show that the person named in the share certificate is the owner of a certain number of shares as is specified in the certificate. The time period for issuing share certificates differs in different situations.
- If the company has just been incorporated, the share certificate should be issued within 2 months from the date of incorporation of the company.
- In case the shares have been transferred to someone, then a transfer certificate has to be submitted to the company. The share certificate will be issued to the new owner within 1 month of the receipt of the transfer certificate by the company.
- Where the shares were allotted to the person, the share certificate has to be issued within 2 months of the date of allotment of the shares.
It was held in Cardiff Chemicals’ case[v] that the burden of proof of proving that the share certificates have been delivered to the owner of the share or the shareholders, is on the company. Moreover, it has been held that if the directors of a company can prove that the transfer of shares has been done in bad faith, then the transfer can be denied if they prove their allegation.[vi]
The share certificate has to be issued even if the shares are not fully paid for. if the security is in a DEMAT form, then there is no need for issuing a share certificate. Once securities have been allotted by the company, the company is responsible for intimating such details of allotment to the depository.[vii] Share certificate has precedence as evidence when the other evidence is the register of members since the latter is under the control of the company.
A share certificate needs to specify the following things:
- Name of the member, that is the person who now owns the shares[viii]
- It should carry the common seal of the company
- Number of shares which have been subscribed to
- Amount paid for subscribing to these shares
- A distinctive number of the shares subscribed to
- The number of the share certificate itself
- The folio number of the member
- The name of the company, the registered office of the company, and the CIN of the company
However, before issuing the share certificate, the company needs to meet certain requirements
- At the time of the incorporation of the company, there should have been some subscription or allotment of shares
- Board resolution needs to be passed by the board of directors in board meetings for issuing share certificates[ix]
- The share certificate will be valid only if it has been signed by 2 directors one of whom is someone other than whole time director or managing director.[x]
- The company secretary also needs to sign the share certificate, unless someone else has been authorized by the board of directors to make sign signatures.
- Only the registered office of the company can issue the certificate
- The stamp duty needs to be paid by the company in accordance with the Stamp Act in their state after issuing the certificate
- The share certificate should mention all the important particulars.
A register of members has t be maintained with the details of the share certificates which have been issued,[xi] along with the name of the member to whom the shares were issued and the date of issue.[xii] If in case, there is a situation of bulk issue of share certificates, then the signature of the 2 directors required on the share certificate can be done by use of some equipment, machine, or other mechanical means, in this case, the director who is using such equipment needs to ensure that the signature has been affixed and the equipment has not been tampered with. In such bulk signing, the third signing on the certificate needs to be an actual sign, and cannot be done by some equipment.
An authorized person by the board of members will be responsible for printing and a blank form for the issue of share certificates. Even to print blank share certificates, the board of directors needs to pass a resolution. The accounts of these forms will be maintained by the authorized person responsible for maintaining them. once share certificates have been returned to the company, they are to be defaced by the printing or stamping of the word “cancelled” in bold letters on the certificate. They can be destroyed 3 years after expiry from when they are surrendered to the company. The board of directors will pass a resolution to start the process of defacing these certificates, and a person will be appointed to ensure that this is done properly, and the defacing will only happen in his presence.
A company can also issue fresh certificates by replacing, consolidating, or splitting old certificates. They can be issued if
- If the certificate has been defaced, is torn or old, is decrepit, worn out, or mutilated, or
- If it is sub-divided consolidated, or
- Where pages on the reverse for recording transfer have been utilized.
The fresh certificate can only be issued once the old certificate has been surrendered and the company can charge up to Rs. 50 for issuing the fresh certificate.
[i] Companies Act, 2013, Section 2(84).
[ii] Companies Act, 2013, Section 43.
[iii] Companies Act, 2013, Section 43, Explanation (ii).
[iv] Companies Act, 2013, Section 43, Explanation (i);
Juvansinhji Balusinhji & Ors. v. Bhalbhadrasinhji Indrasinhji, (1962) 0 GLR 715.
[v] Cardiff Chemical v. Fortune Bio-Tech Ltd., (2004) 55 SCL 645.
[vi] Bajaj Auto v. N.K. Firodia, 1971 AIR 321, 1971 SCR(2) 40.
[vii] Companies Act, 2013, Section 56(4).
[viii] Companies (Share Capital and Debentures) Rules, 2014, section 5(2).
[ix] Companies (Share Capital and Debentures) Rules, 2014, section 5(1)(a).
[x] Companies (Share Capital and Debentures) Rules, 2014, Section 5(3)(a).
[xi] Companies Act, 2013, Section 88.
[xii] Companies (Share Capital and Debentures) Rules, 2014, Rule 5(4).
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