Fresh off raising capital- Here is what you need to know about Share Certificates!

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We often come across companies raising Seed Round, Series A, B, C rounds from various investors. These investments are often made in return for the company’s securities.
One such security that provides ownership interests to the investors is the company’s equity. There are also hybrid securities that convert to equity at a later point in time that provide investors ownership benefits in the company.

All shares so issued for the capital received need to be evidenced in some form. The form is at the discretion of the shareholder. If the proof of ownership of these shares are in physical format, it is known as a share certificate. Shares in electronic form is a demat share.

In this article we have covered the introduction to holding shares in the physical form.

1. What is a share certificate?

A share certificate is a physical proof of the number and class of shares held by an individual member of the company. It provides evidence that an individual is a shareholder of the company. A share certificate is also a document of title. It is not just proof of ownership. For that reason, the share certificate can be pledged. Since share certificates are issued post receiving the capital amount, it also provides proof that the subscribed shares have been paid up for and the company has allotted shares towards such payment. Every share certificate issued must contain the following details:
  • Name of the shareholder
  • Folio Number
  • Share certificate Number
  • Distinctive Number of shares
  • Type and number of shares
  • Nominal value of the shares
  • Paid up amount of capital
  • Company’s common seal (if any)
  • Signature of at least 2 Directors of the company/or by 1 director and the Company Secretary, wherever the company has appointed a Company Secretary.
All details of share certificates issued by the company have to be recorded and maintained by the company secretary or any person authorized by the Board.

2. What is the time limit to issue share certificates to investors?

Depending on the nature of the transaction, share certificates have to be issued within the following timelines:
  1. Individuals who have contributed towards the initial capital and given their consent to the formation of the company (subscribers to the memorandum) have to receive the share certificates within two months from the date of incorporation. Such shares may be converted to demat shares later if the shareholder wishes to do so.
  2. Other members to whom shares have been allotted have to receive the share certificates within a period of two months from the date of allotment.
  3. In case of transfer of shares, share certificates have to be issued within a period of one month from the date the company receives the instrument of transfer.
  4. In case of transfer of shares, share certificates have to be issued within a period of one month from the date of receipt of intimation of such transfer.
It has to be noted that in the case where the shares or securities are dealt with a depository, the company shall intimate the details of such allotments to the depository immediately.

3.How are shares issued under the physical form of shares?

  1. Board meeting: Companies desiring to issue share certificates under the physical form have to first convene a Board Meeting. The Board must pass a resolution approving the allotment of shares to the investors.  
  2. Issue of share certificate: Once the money is received, the company has to issue the share certificate within 60 days from the date of passing the board resolution. The share certificate has to be signed by atleast 2 Directors of the company and  the applicable stamp duty must be paid according to the state where the company is registered.

4. How is stamp duty payable on the physical form of issue of shares?

Under the Indian stamp Act, stamp duty is payable by the company on fractions of the total value of shares mentioned on the share certificate and not on the face value. The rate of stamp duty differs from state to state. For example, Re.1 stamp duty is payable for every Rs.1000 value of stock in the state of Karnataka.

The stamp duty must be paid within 30 days from the date of issue of shares and the payment can be made online in the states that allow e-stamping.  

Common documents that companies will need to submit while making the payment of stamp duty include:

  • Share certificates
  • Certificate of Incorporation
  • MOA and AOA
  • Board resolution passed approving the issue of share certificates
  • List of all allottees (PAS-3)
  • List of Directors or any person authorized by the Board to make payment in this regard.  

Note: These requirements differ from state to state

Issuing share certificates is an important item on the company’s compliance calendar. For shares being dealt in digitized form, companies have to follow a different set of procedures. For information on dematerialisation of shares, refer to our article on “What are demat shares and how is it different from holding the physical form of share certificates”.

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