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written by | April 22, 2022

What are Share Certificates and How do They Work?

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A share certificate, historically, was evidence of entitlement to dividends. The charge of the dividend was endorsed at the back when presenting the certificate. The document contained all the information on dividend bills. When a company issues shares in a market, the certificate is issued to the shareholders who buy it. Stock certificates prove ownership and purchase of a company's stock. This document certifies the registered owner of the shares as of the specified date.

Share certificates are usually issued to shareholders to prove their shareholding authority. Occasionally, shareholders with valid certificates can give other people's proxies to vote for the shares in question. Similarly, shareholders without valid certificates can be other people's agents so that they can vote for the shares involved.

Did you know?

In India, Section 84 under the Companies Act defines a share certificate. According to the act, a share certificate specifies and authorises the member's shareholding in a company under their common seal.

Also Read: How Do You Calculate Taxes on Income Generated From Share Sales?

What Is a Share Certificate?

A share certificate is a deed signed on behalf of the company and serves as legal evidence of ownership of a specified number of shares. Share certificates are also called stock certificates.

In the United Kingdom, the Companies Act of 2006 requires companies to issue share certificates at the allotment of shares. One company must issue a share certificate within two months of the issuance or transfer of shares. A company may only issue one certificate for every share issued or transferred at any time unless shareholders require a separate certificate. 

The company charter and enterprise law define voting rights. If The stock certificate is re-issued for the same number of stock or shares, if it gets damaged, lost or stolen. In such cases, shareholders must return the damaged document to the company before issuing a replacement. At this time, shareholders can also exercise their right to issue a single certificate or individual certificate.

Procedure To Issue A Share Certificate

The most important and searched question is how to get the share certificate online or offline. As discussed below, the procedure to issue a share certificate has a few steps:

  • Board meeting for allotment of shares: A board of directors is convened to decide on the allotment of shares. The board of directors appoints a committee called the allotment committee. This allotment committee decides on the allotment of shares. After the allotment committee submits a report on the allotment of shares, the board of directors approves the report. It decides on the allotment of shares to the relevant applicants. After the allotment committee has allotted the shares, the company secretary will send an allotment letter to the member. It is a letter notifying the applicant that the company has allotted a certain number of shares. This transfer letter will serve as a share certificate until the final certificate is issued.
  • Registration on the register of members: Next, the academic society secretary creates a list of members from the application list received and the assignment form. The membership list contains information about shareholders and details of their shares.
  • Preparing and printing the certificates: The company secretary must adjust the share certificate format according to the format proposed in the articles of incorporation. The secretary must have a printed form with all necessary information by the provisions of applicable law. The secretary must fill out the share certificate details using the application and allocation forms. The secretary also needs to make sure that two company directors sign the stock certificate. The secretary must sign the stock certificate. The secretary ensures each share certificate has the company and tax stamps. After completing the issuance of share certificates, the board of directors convenes to pass the issuance of the certificates.
  • Intimation of the share certificate and dispatch: The company secretary must notify all shareholders that the stock certificate is ready and will be delivered to the certificate and bank receipt confirming the payment of the prize. Members must receive general information regarding the same. Members who submit a letter of attribution will be sent information by registered mail. Local shareholders can also collect the share certificates directly from the company's registration office or the office entrusted with shipping the share certificates.

Advantages and Disadvantages of Share Certificates

There are both advantages and disadvantages of share certificates. If you have extra cash and want to make huge dividends (the amount your company gives to shareholders from its monthly earnings), we recommend considering stock certificates.

 A certificate of deposit account is equivalent to a stock certificate account (CD). However, the credit union issues it, not the bank. Stock certificates are a great way to collect dividends while increasing your savings. You can't withdraw your savings over a period without a penalty, but you'll almost certainly get a higher interest rate than any other option.

The Advantages of Share Certificates

  • Adaptable term: As an investment, you can always guarantee an accurate rate of return. Financial planning is even easier because you can calculate how quickly your account balance increases.
  • Yield is high: Stock certificates have high yields, but they are a safe way to invest money over time among the many savings products. Consider whether the extra profit will outweigh your investment in time and choose the one that works best for you.
  • Rates for the certificate: The annual rate of return represents the dividend or profit you can receive on a stock certificate. This rate includes the compound interest period or the frequency with which revenue credits to your account. Credit unions have the option to calculate annual, quarterly, monthly and even daily interest rates.
  • Better returns: In the case of financial institutions, the certificate is more valuable than the standard savings account, as the certificate holder can not move money freely as much as regular savings customers. As a result, the interest rate of the certificate is more important than the standard savings account. In this way, you can make your investment better.

The Disadvantages of Share Certificates

  • From the company's point of view, the main drawbacks are time and money. Issuing paper stock certificates is labour-intensive and costly. Companies usually need an entire team dedicated to managing the stock certificate system. Maintaining the share certificate system involves a huge amount of tedious paperwork. For example, transactions such as mergers and spin-offs have to wait until you sign a paper certificate and send it to your company. Compliance is also much more difficult to deal with.
  • Liquidity is limited: Certificate holders do not have the same access to funds as regular savings account holders. If you want to remove money from the CD before it expires, you will have to pay the penalty. This penalty may represent a loss of interest or a penalty for the principal.
  • Penalties: You will usually have to pay a fine if you withdraw money from a stock certificate before maturity. Depending on your account contract, the amount may be part of your profit.

Also Read: ESOP - Employee Stock Ownership Plan

Special Point To Consider About Share Certificates

Today, individual investors in modern financial markets rarely physically own stock certificates. In fact, some countries such as Sweden have completely abolished the issuance of share certificates as proof of ownership of a company's shares and streamlined registering owners through electronic registration.

Share certificates can be in either registered or bearer format. Beared stock certificates are only proof of ownership, but bearer stock certificates, which are not common today, give owners the right to exercise all legal rights related to the stock.

Many stock certificates, especially old and rare specimens, have become highly collectable items due to their historical background and the beauty and complexity of their designs. "Scripophilia" is the collection and investigation of stock certificates and similar financial statements. Similar to collecting stamps and banknotes, the value of a stock depends on its condition and age.

Penalty for Breach in Issuance of Share Certificates

Suppose a company does not comply with the issuance of stock certificates. In that case, the company will be subject to a fine of ₹ 25,000 to ₹ 5,00,000 and the non-performing officers of such a company will be fined more than ₹ 10,000 can be up to ₹ 1,00,000.

Conclusion

Shareholders with share certificates can exercise their voting rights over other people. Similarly, shareholders without a certificate may be allowed to vote for shares related to others. Please note that voting rights apply as defined in the company's Articles of Incorporation and the Companies Act. This post has all the vital information for issuing a share certificate and its advantages and disadvantages.

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FAQs

Q: What are the details provided in the share certificate?

Ans:

The details provided in a share certificate are the name of the issuing firm, CIN, company's registered address, members folio number, number of shares, amount of money spent, and the shareholder's full name.

Q: Can share certificates be transferred on death to another person?

Ans:

Yes, after the death of an individual, one can inherit share certificates.

Q: What does a share certificate mean?

Ans:

A share certificate is a deed signed on behalf of the company and serves as legal evidence of ownership of a specified number of shares. Share certificates are also called stock certificates.

Q: What will happen if you lose your original share certificate?

Ans:

If you accidentally damage or lose your share certificate, you should inform your transfer agent and apply for a duplicate certificate.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.