What is a Share Certificate?

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With the development and prevalence of electronic trading, traders and investors are so used to instant trades today that they do not often stop to think about how their ownership in a company is constantly changing with each buy or sell order that is executed. You too may have bought the shares of many companies, traded off some right away, and held on to the others for the long term. 

The shares that you hold in your demat account represent your partial ownership in the companies that issued those shares. In this regard, the share certificate is a very important document. Want to know what it is, the details it contains and why it is necessary? Find out all about these details in this article. 

What is a Share Certificate?

Also known as a stock certificate, the share certificate is a physical document a company issues to its shareholders. It serves as evidence of ownership of a certain number of shares in a company. 

To ensure that the document is not forged, companies often incorporate several unique design elements into their share certificates including affixing the signature of the director authorised to issue the shares and the common seal of the company. 

Companies also generally have different share certificates depending on the nature of the shares. For instance, a company may issue two different types of certificates – one for common equity shares and another for preferred shares.

However, thanks to the advancement of technology and the advent of the demat account, the practice of issuing share certificates has stopped. 

What Information Does a Share Certificate Contain?

Now that you know the meaning of a share certificate, let’s check out the different details you can often find in one. 

  • Company Information 

The name of the company issuing the shares, its registered office address and Corporate Identification Number (CIN), among others are found on a share certificate.  

  • Shareholder Information 

The certificate also contains the name of the shareholder, their address as per the company’s records and their folio number. 

  • Details of Shares 

Every share certificate is required to clearly mention details such as the certificate number, the class of issued shares, the number of shares owned and the distinctive numbers of the shares. 

  • Face Value of Shares 

In addition to the above share-related details, the certificate will also contain the face value of the issued shares. Face value refers to the base value of the shares assigned by the company at the time of incorporation. 

  • Issue Date 

The date on which the share certificate was issued to the holder will also be clearly listed. 

Why are Share Certificates Important?

The primary purpose of share certificates is to act as proof of ownership of shares in a company. They help the company easily identify genuine shareholders from investors claiming to be shareholders. By keeping track of the share certificates issued to its shareholders, a company can easily use the information to calculate and distribute dividends. Shareholders may also use the share certificates as evidence of ownership to claim unpaid dividends and other benefits, if any, from the company. 

When Does a Company Issue Share Certificates?

A company issues share certificates when it sells or allocates fresh equity shares to eligible investors through fundraising activities like Initial Public Offering (IPO), Follow-On Public Offering (FPO), rights issues and private placement. 

A company may also issue new certificates replacing old ones in the case of any major change to its share capital such as after a stock split or stock consolidations. Also, if there has been any kind of vertical or horizontal share transfers, a company may issue a new certificate to the new holder. 

And finally, if the existing share certificates are either lost or damaged, companies may choose to issue duplicate share certificates to their shareholders on the receipt of an application. 

What is the Procedure for Issuing a Share Certificate?

To issue a share certificate, a company has to follow a particular procedure as laid out in the Indian Companies Act. Here’s the overview of the key steps. 

  • Board Approval

In the case of a fresh issue of shares, the company has to first hold a meeting of its Board of Directors. In the meeting, the board approves the formation of a share allotment committee. The committee deliberates the issue of new share certificates to the eligible investors and prepares a detailed report, which is submitted to the board. 

Once the report is received, the board will accord its approval for the issue of share certificates. Upon receiving the approval, the company secretary sends a letter confirming the allotment of shares to all the eligible investors. 

  • Member Registration

The company secretary then prepares a Register of Members, where all the details of the eligible investors are entered. This includes their name, address, their folio number, the number of shares allotted to them, the class of shares issued, the certificate number and the distinctive number of the shares, among others. It will also contain the amount paid by the shareholders and the face value of the shares. 

  • Certificate Printing 

Once the respective entries are made in the Register of Members, the company secretary proceeds to print the share certificates. After printing the share certificates, the company secretary ensures that they’re signed by the company’s director and affixes the common seal. 

  • Dispatch 

Once printing and signing are complete, the company secretary dispatches the new share certificates via mail to all the eligible shareholders at the address mentioned at the time of application. A notification by way of email, SMS or a letter is sent to the eligible investors informing them of the dispatch. 

Also Read: What is Sweat Equity?

Conclusion

If you have purchased shares of a company and have received share certificates in the physical format, ensure that you dematerialize your shares right away. The Securities and Exchange Board of India has made it mandatory for every shareholder to convert their existing physical shares into electronic format. 

To do this, you will need a demat account, which you can open with Bajaj Broking. All you need to do is follow a simple 3-step process to open your demat account today, so you can hold your share certificates electronically. 

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