Understanding Share Certificate: Meaning, Issuance Process, and Advantages

A share certificate is a crucial document that proves ownership of shares in a company and serves as an official record of investment.

It serves as a legal record of shareholding, outlining key details such as the shareholder’s name, the number of shares held, and the date of issuance.

Understanding share certificate's significance is essential for maintaining accurate corporate records and ensuring compliance with regulatory requirements.

This blog breaks down everything you need to know about share certificates—what they are, how to issue a share certificate in a private company and the benefits they offer. You'll also learn about the use cases of a share certificate and why companies must handle these documents carefully.

What is a share certificate?

A share certificate is a legal document that serves as proof of ownership of shares in a company. It is issued to shareholders after the allotment or transfer of shares and includes details such as the shareholder’s name, the number of shares held, the certificate number, and the distinctive share numbers.

P.S. Distinctive numbers apply only to physical shares. In dematerialised (demat) form, shares do not have distinctive numbers; they are credited to the investor’s demat account.

As per the Companies Act, 2013, companies must issue share certificates within a prescribed timeframe—within two months of share allotment or one month of a share transfer. It acts as an official record of shareholding and is essential for exercising shareholder rights, including voting and dividend claims. 

A share certificate includes details like:

- Company name

- Registered address

- Corporate Identification Number (CIN)

- Shareholder's full legal name

- Shareholder's address

- Share certificate number

- Number of shares held

- Class of shares

- Issue date of shares

- Amount paid on shares

- Member's folio number 

When does a company issue share certificates?

A company issues share certificates to formally document and confirm the ownership of its shares by shareholders. These certificates serve as legal proof of ownership and are typically issued in the following scenarios:

‍a. Incorporation‍

When a new company is established, it issues share certificates to its initial shareholders, confirming their ownership stakes.

b. Share allotment‍

When a company raises capital by issuing new shares, it provides share certificates to the new shareholders as evidence of their investment.

c. Share transfer‍

If an existing shareholder transfers their shares to another individual or entity, the company issues a new share certificate to the transferee, reflecting the updated ownership.

d. Bonus shares‍

When a company distributes bonus shares to existing shareholders, it issues new share certificates to represent these additional shares.

These practices ensure that ownership records are accurate and that shareholders have tangible proof of their holdings. 

Key information included in share certificates

A share certificate serves as a formal document issued by a company to confirm an individual's or entity's ownership of a specific number of its shares. 

Key components typically included in a share certificate are:

a. Certificate number: A unique identifier assigned to each share certificate.

b. Company name and registration number: The official name of the issuing company along with its registered identification number.

c. Registered office address: The official address of the company's headquarters.

d. Shareholder's name and address: Full name and contact address of the individual or entity holding the shares.

e. Number and class of shares: The total number of shares held and the specific class or category of these shares.

f. Issue date: The date on which the shares were issued to the shareholder.

g. Amount paid or considered as paid: The monetary value paid for the shares, indicating whether they are fully or partially paid.

h. Signatures: Authorized signatures, typically from company directors or the company secretary, validating the certificate.

Including these components ensures that the share certificate comprehensively represents the shareholder's entitlement and serves as a reliable record of ownership.

Digital vs physical share certificates

Share certificates can be issued in either physical or digital form, depending on regulatory requirements, company policies, and investor preferences. While physical certificates were once the standard, most jurisdictions now encourage or mandate digital certificates for efficiency, security, and compliance reasons.

Digital share certificates

Digital or electronic share certificates exist in dematerialised form and are maintained in an electronic format with a central depository. These certificates are more secure, easily transferable, and reduce risks associated with loss, forgery, or damage.

Digital share certificates are:

- Easier to store, retrieve, and transfer.

- More secure against loss, damage, and forgery.

- Reduces administrative costs and paperwork.

- Allows for seamless verification and record-keeping.

Scenarios where digital share certificates are issued

- Publicly listed companies: SEBI mandates that all listed companies must issue and maintain shares in dematerialised (demat) form.

- Companies planning an IPO: Any company aiming to go public must ensure shares are in demat form before listing.

- Mandatory dematerialisation rules: Under the Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, eligible unlisted public companies must convert their physical share certificates into electronic form by June 30, 2025.

- Transfer of shares: Since April 1, 2019, SEBI has prohibited the transfer of shares in physical form, except in cases of transmission (inheritance) or transposition (rearrangement of names).

Physical share certificates

A physical share certificate is a paper document that serves as proof of share ownership. It includes details such as the shareholder’s name, the number of shares held, certificate number, and the company’s seal.

Scenarios where physical share certificates are issued:

- Private limited companies (not covered under mandatory demat rules): Private companies that are not required to dematerialise can still issue physical share certificates unless voluntarily opting for demat.

- Transmission of shares: If a shareholder passes away, legal heirs may receive the physical certificate before choosing to convert it into demat form.

- Government and statutory exemptions: Certain government-issued securities or regulated sectors may still allow physical certificates under special provisions.

The procedure issuance of share certificates

Issuing a share certificate is a formal process that ensures proper documentation of share ownership within a company. It follows a structured procedure to comply with legal and regulatory requirements. 

Below are the key steps involved in the issuance of share certificates:

1. Board resolution

The company’s board of directors must pass a resolution approving the issuance of share certificates. This usually happens during a board meeting. This resolution is usually recorded in the minutes of the board meeting and specifies details such as the number of shares being issued, the names of shareholders, and the authorised signatories. In India, this step ensures compliance with the Companies Act 2013 and other applicable regulations.

2. Share allotment or transfer approval

The company confirms the allotment of new shares or the transfer of existing shares to the intended shareholder. If shares are newly allotted, the company must first ensure that proper applications, payments, and approvals are completed. If shares are being transferred, the company verifies the Share Transfer Deed (SH-4) along with supporting documents like the original share certificate and identity proof of the buyer.

For both allotments and transfers, the company must comply with the share capital structure mentioned in its Articles of Association (AoA).

3. Preparation of share certificates

The company prepares the share certificate using the prescribed format, such as Form SH-1 under the Companies Act, 2013. The share certificate contains all necessary details, such as:

- Name of the shareholder

- Number and class of shares issued

- Distinctive share numbers

- Certificate number

- Date of issue

The share certificate must also reflect any restrictions or rights associated with the shares, such as voting rights or dividend entitlements.

4. Stamping and signing

The share certificate is stamped (if required by law) and signed by the company’s authorised signatories, usually the director and company secretary. 

The document is signed by two directors of the company, or one director and the company secretary (if appointed).If the company does not have a secretary, another authorised officer can sign the certificate.

A company seal may also be affixed if required by the Articles of Association (AoA).

5. Entry in the register of members

The company updates the register of members with the shareholder’s details, including:

- Name and address

- Number of shares allotted or transferred

- Date of issuance

- Share certificate number and distinctive numbers

Maintaining an updated register is mandatory under the Companies Act, 2013, as it serves as legal proof of ownership.

6. Issuance to the Shareholder

The completed share certificate is handed over or sent to the shareholder within the prescribed time limit, usually within two months from the allotment or transfer. As per Rule 5 of the Companies (Share Capital and Debentures) Rules, 2014, the timeline for issuance is:

- For allotment of new shares – within two months from the date of allotment.

- For transfer of shares – within one month from the date of transfer.

- For issue of duplicate or split certificates – within three months of receiving the request.

The company should maintain proper records of issuance to ensure compliance and prevent disputes. EquityList helps you do that by allowing you to securely store all your share certificate data in one place. We also allow you to digitally issue share certificates and initiate transfers when required.

This structured approach ensures that share certificates are legally valid and serve as official proof of ownership. 

Legal & transactional importance of share certificates

A share certificate is a crucial document that provides legal proof of share ownership in a company. It plays a significant role in corporate transactions, legal recognition, and shareholder rights. Beyond serving as a physical record of ownership, share certificates facilitate various financial and legal processes. Here are the key reasons why they hold importance:

- Legal proof of ownership: A share certificate serves as an official document confirming a shareholder’s ownership and rights in the company.

-Essential for share transfers: When shares are bought or sold, the share certificate is required to complete the transfer process and update company records.

- Facilitates loan and collateral arrangements: Shareholders can use share certificates as collateral to secure loans or financial backing from banks and financial institutions.

- Entitlement to dividends and voting rights: Holding a valid share certificate ensures that the shareholder is entitled to receive dividends and exercise voting rights in the company’s general meetings.

- Prevention of disputes: A properly issued share certificate helps resolve and prevent ownership disputes, ensuring clarity and legal backing in case of conflicts.

- Compliance with regulatory requirements: Many corporate laws require companies to issue share certificates to maintain transparency and compliance with regulatory authorities.

- Inheritance and succession planning: In case of a shareholder’s demise, a share certificate acts as legal proof for heirs or nominees to claim ownership and transfer shares accordingly.

Share certificates play an integral role in corporate governance, financial transactions, and legal compliance, making it a fundamental asset for both companies and shareholders. 

Replacement of share certificates

A share certificate is a vital document that proves ownership of shares in a company. However, situations may arise where a shareholder needs a replacement due to loss, damage, theft, or other reasons. The process for replacing a share certificate ensures that ownership records remain accurate while preventing fraudulent claims. Below are the key steps involved in obtaining a replacement:

- Reporting the loss or damage: The shareholder must immediately notify the company in writing about the lost, stolen, or damaged share certificate. If lost or stolen, a police report may also be required.

- Submission of an indemnity bond: To safeguard against fraudulent claims, the shareholder is often required to provide an indemnity bond, ensuring that they take full responsibility for any misuse of the lost certificate.

- Verification by the company: The company reviews the request and verifies the shareholder’s details against its records to prevent unauthorized replacements.

- Board approval: The company’s board of directors may pass a resolution approving the issuance of a duplicate share certificate.

- Payment of fees (if applicable): Some companies charge a nominal fee for issuing a replacement certificate, depending on their policies.

- Issuance of a duplicate share certificate: Once all formalities are completed, the company issues a new share certificate with a unique identification number, marking it as a 'Duplicate.'

- Update in the register of members: The company records the new certificate details in the register of members to maintain accurate ownership records.

Replacing a share certificate follows a structured and secure process to prevent misuse while ensuring that shareholders have legitimate proof of their ownership.

Conclusion

A share certificate is a fundamental proof of ownership, ensuring transparency, security, and legal recognition. From its issuance to its role in transactions, compliance, and shareholder rights, share certificates play a crucial role in maintaining the integrity of company ownership records.

Understanding the procedure for issuing, replacing, and utilizing share certificates helps shareholders and companies navigate legal and financial matters efficiently. Whether for investment validation, share transfers, or inheritance purposes, share certificates provide assurance and protection to all stakeholders.

FAQs

1. What is a share certificate?

A share certificate is an official document issued by a company that confirms ownership of a specific number of shares held by an individual or entity. It serves as legal proof of shareholding and grants shareholders certain rights, such as voting and dividend entitlements.

2. How to issue a share certificate in a private company?

A share certificate is issued after the company formally allots shares to an investor. 

First, the board of directors passes a resolution approving the allotment or transfer of shares. Next, the shareholder’s details, including name, number of shares, and distinctive share numbers (if physical share certificates are issued), are recorded in the Register of Members. The company then prepares the share certificate using the prescribed format, ensuring it includes all essential details such as the shareholder’s name, share class, certificate number, and date of issue. Once prepared, the certificate is stamped (if required by law) and signed by the company’s authorized signatories, typically two directors or one director and the company secretary. Finally, the completed share certificate is issued to the shareholder, either as a physical document or in electronic (demat) form, within the legally mandated timeframe—usually within two months of allotment or one month of a share transfer. 

3. Share certificates must be signed by whom in the company?

Share certificates must be signed by two directors of the company or one director and the company secretary (if appointed); if the company does not have a secretary, another authorized officer may sign in their place.

4. Why is a share certificate important?

A share certificate ensures transparency in share ownership, simplifies the process of transferring shares, and helps shareholders exercise their rights. It also serves as a legal record for resolving ownership disputes and tax-related matters.

5. How does EquityList help in managing share certificates?

EquityList digitizes the issuance and management of share certificates. It allows users to store existing share certificate data, issue new certificates, and facilitate digital transfers from a single platform.

6. Can EquityList assist with electronic share certificates?

Yes, EquityList supports electronic share certificates, enabling companies to issue and manage them securely. This helps reduce administrative overhead, ensures compliance with regulations, and facilitates seamless share transfers. With the recent MCA mandate for dematerialisation, EquityList also assists companies in transitioning to electronic shares from physical share certificates.