SHARE CERTIFICATE

INTRODUCTION

A company issues shares in order to raise its capital from investors. The money collected from the issuance of shares is used to expand the company. Any person who purchases any number of shares of the company becomes the shareholder of the company which shows his/her interest in the company. When a person buys shares, the company issues a share certificate to that person as a proof of his/her ownership of shares and can be used while transferring or selling shares. This article gives a detailed view of a share certificate, its effects.

SHARE CERTIFICATE

According to Section 46 of the Companies Act, 2013[1], a share certificate is a certificate that is given to the allottee who is a person purchasing the shares stating that he/she is the holder of a specified number of shares in that company. The main objective of issuing a share certificate is that it gives prima facie evidence of the title that he/she has the title to a specified number of shares thus enabling him/her to sell their shares by showing at once a marketable title.

This section also provides that the share certificate that is issued must have a common seal or must be signed by two directors or a single director and the Company secretary and must also mention the specific shares held by that person, if these elements are mentioned only then the share certificate will be regarded as prima facie evidence.

An important criterion for the issue of share certificate is that every certificate who makes allotment of shares is under an obligation to deliver to that allottee a certificate of shares within a prescribed time period i.e., two months after the allotment. The burden of proof falls upon the company to show that share certificate has been dispatched.

Section 20 of the Companies Act, 2013[2] provides the manner in which the share certificate must be delivered. In the case of Cardiff Chemicals Ltd v Fortune Bio-Tech Ltd[3], the company did not produce any conclusive proof dispatch, the court held that it was the positive duty of the company to deliver documents.

Share certificate is not only a mere document but also a right of the allotee which must be given to him/her and cannot be defeated by putting up the right of lien for any dues owned by the allottee to the company[4]. In the case of Ranbaxy Laboratories Ltd v Indra Kala[5], the company had failed to register a debenture transfer and to issue a new certificate. It was held that lien is not exercisable against the responsibility to issue certificate to allottees.

Section 56(4) of the Act[6] provides the time period for the delivery of shares. It states that every company must deliver the certificates of all securities that are allotted, transferred or transmitted in the following situations-

  1. In case of subscribers to the memorandum, within two months from the date of incorporation
  2. In case of allotment of shares, two months from the date of allotment
  3. In case of transfer or transmission of shares, within a period of one month from the date of receipt of the instrument of transfer
  4. In case of allotment of debenture, within a period of six months from the date of allotment.

EFFECT OF SHARE CERTIFICATE

  1. Estoppel as to title – A share certificate is the declaration by the company that in whose name it is issued is the shareholder in that company. It binds the company and is estopped from denying the shareholder’s title to the shares. If a person fraudulently obtains the shares of a company and sells it to the other person and if that person finds out that the shares were sold with a mala fide intention the company is supposed to compensate for his/her loss. In the case of Dixon v Kennaway & Co.[7], the plaintiff applied had applied for 300 shares and the clerk in that who owned no shares executed a transfer in favour of the plaintiff. The company without requiring the clerk to produce his certificate registered the transfer and issued a share certificate to the plaintiff. The company in this case was held liable for the damages.
  2. Estoppel as to payment– If it is mentioned in the share certificate that the allotee has paid full amount in each of his shares then the company is estopped as against a bona fide purchaser of the shares from alleging that they are not fully paid. In the case of K Md Farooq Ahmed v Fortran Cirkit Electronics (P) Ltd, the shares were issued as fully paid and there was no fraud in the transaction on the part of the holder, the company was held liable to be under an estoppel as to payment and was not allowed to question it after a long period of time during which the holder had obtained loan on the security of shares in good faith.

DUPLICATE CERTIFICATE

Section 46(2-5) of the Companies Act, 2013[8] says about duplicate certificate. When a share certificate is issued by the company to the shareholder it is the duty of the shareholder to keep it in a safe custody. Still in case the share certificate is lost or destroyed or has been defaced or mutilated or torn, a duplicate certificate is issued to that person.

If a company issues a duplicate certificate with a sole intention to defraud then the company shall be punishable with a fine which shall not be less than five times the face value of the shares involved in the issue of the duplicate certificate but which may extend to ten times the face value of such shares or rupees ten crores whichever is higher and every officer of the company who is involved in the default shall be liable for action under Section 447 which provides punishment for corporate fraud.

In the case of Sujata Khetawat v Ushashree Tea (P) Ltd[9], the share certificates were delivered to the holder’s husband but because of matrimonial differences they could not reach her, the Company Law Board ordered the issue of duplicate certificates.

ISSUANCE AS PER COMPANIES (SHARE CAPITAL AND DEBENTURE) RULES, 2014

Rule 5 provides the procedure and the terms for issue of share certificate. A share certificate must be issued –

  1. In pursuance of a resolution passed by the Board or
  2. By surrendering a letter of allotment or fractional coupons of requisite value in cases of issue against acceptance of renunciation or in cases of issue of bonus shares.

Every share certificate shall be issued under Form No. SH-1 and shall specify the name(s) of the person(s) in whose favour it is issued, the shares and the amount that is paid up. The rules further provides that every share certificate be issued under the seal of the company which shall be affixed in the presence of two directors and a company secretary or any other person as appointed by the Board of Directors. Every share certificate that is issued shall be entered in the Register of Members along with the name(s) of person(s) to whom it is issued and must also indicate the date of issue[10].

CONCLUSION

A share certificate is a document which provides proof of the purchase of shares and defines the ownership of the shares to the person who has purchased it. A share certificate is issued as a safety measure on the part of the company in order to keep a track of the issuance of the number of shares and any person who does not comply shall be held liable under the Companies Act, 2013. The company issues a duplicate share certificate in case the original share certificate is defaced and a reasonable justification must be given for the same by the allottee.  

REFERENCES


[1] The Companies Act, 2013, § 46, No. 18, Acts of Parliament, 2013 (India).

[2] Id at 20.

[3] Cardiff Chemicals Ltd v Fortune Bio-Tech Ltd, (2005) 126 Comp Cas 275 (CLB).

[4] Avtar Singh, Company Law 148 (Easten Book Company 2018).

[5] Ranbaxy Laboratories Ltd v Indra Kala, (1997) 88 Comp Cas 348 Raj

[6] The Companies Act, 2013, § 56(4), No. 18, Acts of Parliament, 2013 (India).

[7] Dixon v Kennaway & Co, (1900) 1 Ch 833: 82 LT 527.

[8] The Companies Act, 2013, § 46(2-5), No. 18, Acts of Parliament, 2013 (India).

[9] Sujata Khetawat v Ushashree Tea (P) Ltd, (2006) 133 Comp Cas 67.

[10] COMPANIES (SHARE CAPITAL AND DEBENTURE) RULES, 2014, Rule 5.

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