When does a company issue a share certificate?
Following the incorporation of a company, share certificates must be issued within two months from the date of incorporation. In cases where additional shares are allotted to new or existing shareholders, the company is required to issue the share certificates within two months from the date of allotment.
A company issues share certificates in several scenarios, including:
- Incorporation: When a new company is formed, share certificates are given to initial shareholders.
- Share allotment: When capital is raised by issuing new shares, certificates are issued to the new shareholders.
- Share transfer: In cases where shares are transferred to another person, a new certificate is issued to reflect the updated ownership.
- Bonus shares: When the company issues bonus shares to current shareholders, new certificates are provided to cover these additional shares.
Procedure for issuing share certificates
Companies must follow specific procedures and steps when issuing share certificates in India. These mechanisms are designed to ensure regulatory compliance and reduce the risk of discrepancies or fraudulent practices. The procedure for issuing share certificates in India is as follows:
- Allotment of shares - The organisation must first allot the shares to the shareholders, which is usually completed after the board of directors has approved the allotment through an official meeting.
- Preparation of certificates—Once the allotment of shares is sanctioned, the company prepares the certificates, which can be in physical or digital format.
- Information filling - The blank certificates, which generally have complex designs so as to prevent counterfeiting, are then filled by the company with the relevant shareholder information.
- Signature and seal - The penultimate step involves the share certificates being signed by the authorised signatories, such as the company directors, and stamped with the company’s seal.
- Final delivery - The last step is the delivery of the completed certificates to the respective shareholders.
Points to know about share certificates
Here are some key aspects of share certificates within India:
- Mandatory for certain transactions: Share certificates are essential for transactions like selling or pledging shares and transferring ownership.
- Different classes of shares: Certificates may cover different share classes, like equity or preference shares, each with distinct rights.
- Dematerialised form: With dematerialisation, shares can be held electronically through a depository participant, eliminating the need for physical certificates.
- Validity period: Certificates often have a specified validity period, and shareholders should ensure these are current.
- Register of members: A company keeps a register of shareholders, with certificates corresponding to these records.
- Legal significance: Share certificates hold legal value and can be used in legal situations involving ownership or disputes.
Advantages of issuing a share certificate
Issuing share certificates offers several benefits:
- Legal proof of ownership: Certificates provide official proof of shareholding, securing shareholders' rights.
- Facilitates ownership transfer: Share certificates ease the transfer process by documenting ownership changes in the company’s register.
- Enables shareholder rights: Certificates grant rights like voting, dividends, and participation in company decisions.
- Enhances transparency: Certificates promote transparency in corporate governance by clearly recording shareholders and their holdings.
Disadvantages of issuing a share certificate
From a company’s standpoint, the main disadvantage lies in the time and cost involved. Producing paper stock certificates is both labor-intensive and expensive. In many cases, businesses must allocate an entire team solely to handle and maintain the share certificate process.
Despite their advantages, share certificates present certain challenges:
- Administrative effort: Managing and issuing certificates can be demanding for companies with many shareholders.
- Risk of loss or damage: Physical certificates can be lost or damaged, complicating ownership proof.
- Delayed transfers: Transferring shares with physical certificates can be slower than electronic transfers.
- Cost considerations: Printing and distributing certificates can be costly, especially for large shareholder bases.
Conclusion
The dynamic evolution of corporate governance in India through the 21st century was ushered in by a new wave of investor demand that hinged on transparency and accountability. This demand was further supported by more stringent corporate laws and government policies. This metamorphosis has not only reshaped the landscape of corporate functioning but has also reinforced the crucial role of shareholders in driving ethical business practices.
Share certificates have emerged as a prominent tool, as they not only symbolise stock ownership but also secure the trust between companies and their stakeholders, serving as an incorruptible proof of companies’ commitment to transparency and integrity. Such instruments have empowered shareholders to become more vigilant of the companies they have invested in or are planning to invest in. With the rising interest in corporate sustainability, these certificates and other legal documents will be central in the further transformation of the Indian corporate governance landscape.
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