Legal Effect Of Share Certificate

Estimated Reading Time: 8 minutes

Introduction

  1. Shares

‘Shares’ As per Section 2(84) of Companies Act, 2013, means Share in the share capital of a Company and Include stocks. Share or Debentures are movable property transferable in manner provided in the AOA of Company. (Sec. 44)

  1. Share Certificate

A share Certificate is a document showing title issued by a company declaring that the person named therein is the owner of a specified number of shares in the capital of the company. Every person whose name is entered as a member in the register of members, is entitled to get share certificate from the company. It is not a negotiable instrument. The share certificate may be in any form. But a valid share certificate must satisfy the following requirements:

  • It must have the common seal of the company affixed on it.
  • It must specify the number and class of shares. The nominal value of share, distinctive number of shares, certificate number and the amounts actually paid should also be stated in it.
  • It must also state the name of the shareholder.
  • Particulars of all share certificates issued shall be recorded in the Register of Members.
  • It must state the name and the address of the registered office of the company and the date of the issue.

Rule 5 Of Companies (Share Capital And Debentures) Rules, (Amendment) 2018 Relating To Issue Of Share Certificate

  1. Certificate of shares (where shares are not in demat form) [Rule 5(1)]

Where a company issues any share capital, no certificate of any share or shares held in the company shall be issued, except-

(a) by passing a board resolution and 

(b) on surrender to the company of the letter of allotment or fractional coupons of requisite value, except in case of issues against letters of acceptance or of remuneration, or in case of issue of bonus shares.

The share certificate must be ready for delivery within two months after the date of allotment and one month after the date of application for the registration of transfer/transmission.

After the introduction of the Demat System, there is no need to issue the share certificate for the shares registered in the name of the depository. Instead, immediately on allotment of such shares, the company has to intimate the details of allotment of shares to the depository.

2. Share Certificate Format [Rule 5(2)] 

Every certificate of share or shares shall be in Form No. SH.1 or as near thereto as possible and shall specify the name(s) of the person(s) in whose favour the certificate is issued, the shares to which it relates and the amount paid-up thereon. 

3. Prima Facie Evidence of title [Rule 5(3)]

According to Section 46(1) of the Companies Act, 2013, it is a certificate issued under the common seal of the company, if any, specifying the shares held by any person, and shall be prima facie evidence of the title of the person to such shares. In case a company does not have a common seal, the share certificate shall be signed by two directors or one director and a company secretary of the company, wherever the company has appointed company secretary.

In case of a One Person Company, it shall be sufficient if the certificate is signed by a director and the company secretary or any other person authorised by the Board for the purpose. 

A director shall be deemed to have signed the share certificate if his signature is printed thereon as facsimile signature by means of any machine, equipment or other mechanical means such as engraving in metal or lithography or digitally signed, but not by means of rubber stamp, provided that the director shall be personally responsible for permitting the affixation of his signature thus and the safe custody of any machine, equipment or other material used for the purpose. 

Also Read  Sarla Verma & Ors. v. Delhi Transport Corporation & Anr. (2009)

However, share certificate cannot be described as share, it is just a prima facie evidence to the title of the share: [Gopal Paper Mills Ltd. v. CIT Central Calcutta (1966) 1 Com. L.J. 1 174]

Legal Effect Of Share Certificate

We have already stated that a share certificate is a prima facie evidence to the title of the person whose name is entered on it. It means that the same certificate is a statement by the company that the moment it was issued, the person named in it was the legal owner of the shares specified in it, and those shares were paid-up to the extent stated. It does not constitute title but it is merely evidence of title. It is, however, a statement of considerable importance, for it is made with the knowledge that other persons may act upon it in the belief that it is true and this fact brings into the operation the doctrine of estoppel.

1. Estoppel as to title

A share certificate once issued binds the company in two ways. In first place, it is a declaration by the company to the entire world that the person in whose name the certificate is made out and to whom it is given is a shareholder in the company. In other words, the company is estopped (prevented) from denying his title to the shares. The company cannot deny the truth of the certificate as against a person who has relied upon it and who, in consequence, has changed his position.  But if an officer of the company who has no authority to issue the share certificate issues a forged certificate, the rule of estoppel will not be operative against the company: [Rubpen v. Great Fingal Consolidated (1906) A.C. 439] 

2. Estoppel as to payment

If the certificate states that on each of the shares full amount has been paid, the company is estopped (prevented) as against a bona fide purchaser of the shares, from alleging that they are not fully paid. If the person knows that the statements in a certificate are not true, he cannot claim an estoppel against the company: [Bloomenthal v. Ford (1897) A.C. 439]

It has also been held in another case that the bona fide holder of the share certificate, who had no notice that the shares were not actually paid up fully, could sell those shares away as fully paid to a person to a person who knew that they were not fully paid up so as to give the latter a good title to shares as fully paid because the latter derived title from the transferor who had a good title. 

Despite everything, a certificate must be issued by someone who has the authority.

3. Legal effect of issue of Duplicate Share Certificate

Section 46(2) provides that the company may renew or issue a duplicate certificate. The directors are empowered to issue new duplicate share certificate in place of original certificate if such certificate:

  • Is proved to have been lost or destroyed, or
  • Having been defaced or mutilated or torn is surrendered to the company.

A company may issue a duplicate share certificate, if the original certificate has been defaced or mutilated or torn and the certificate is surrendered to the company. But, where the original share certificate is lost, stolen or destroyed, a duplicate share certificate can be issued only as per the provisions of the Articles of Association. The Articles generally prescribe some terms and conditions as to evidence and indemnity. The new certificate shall also be duly sealed and signed and the word ‘DUPLICATE’ shall appear across the face of such certificate. To issue a duplicate certificate, the Board of Directors has to pass a resolution. A nominal fee is usually charged, as per Articles, for such certificate.

Also Read  Sarla Verma & Ors. v. Delhi Transport Corporation & Anr. (2009)

Section 46(3) makes it obligatory for companies to follow the rules prescribed by Government in regard to the following matters:

  1. The manner of issue of a certificate of shares or the duplicate thereof. 
  2. The form of such a certificate.
  3. The particulars to be entered in the register of members, and 
  4. To form such registers.

 Penalties and Punishments

  1. Personification Of Shareholders

As per Section 57, Punishment for personation of shareholder—If any person deceitfully personates as an owner of any security or interest in a company, or of any share warrant or coupon issued in pursuance of this Act, and thereby obtains or attempts to obtain any such security or interest or any such share warrant or coupon, or receives or attempts to receive any money due to any such owner, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

2. Damages Against Company And Directors For Wrong Certificate 

A person acting on the share certificate issued by the company may recover compensation for the damages suffered by him. The measure of damage is the value of the shares at the time of the refusal by the company to recognise him as the shareholder together with interest from that date. Where directors issue a certificate of title of shares which the company has no power to issue, they may be held personally liable to damages on an implied warranty of authority to any person who acts on such certificate.

3. Intent To Defraud By Issuing A Duplicate Share Certificate

If a company, with intent to defraud, issues a duplicate share certificate, the company shall be punishable with fine which shall not be less than five times the face value of the shares involved but which may extend to ten times the face value of such shares or ten crore rupees whichever is higher and every officer of the company who is in default shall be liable for action for fraud under Section 447.

Conclusion

Share certificate has its own significance and it acts as an evidence to the effect that the allottee is holding a certain number of shares of the company showing their normal and paid-up value and distinctive numbers. Moreover, when the company issues a certificate, it holds that the facts contained therein are true. Any person acting on the faith of the share certificate of the company, can compel to pay compensation for any damage caused by any reason of misstatement in the share certificate. Share certificate is only documentary evidence of the title and that the share certificate is a declaration by the company that the person in whose name the certificate is issued is the shareholder of the company. 

Therefore, while buying shares of any company, the share certificates are not just a mere piece of paper but more than that the proof for the ownership of the shares so bought and contains various legal implications.

Further, a certificate is not evidence as to the equitable interest in shares. Lastly, where an individual is aware of the false statements in a certificate, he or she will not be entitled to claim an estoppel.

Leave a Reply

Your email address will not be published. Required fields are marked *