Who can become a shareholder of a company?

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Who can become a shareholder of a company?

Section 2(84) indicates ownership of an individual towards the company whose shares was purchased. By owning shares from a company one becomes an investor and as per Companies Act, 2013 claims the voting rights. Those who hold the share of the company fall under the category of shareholder thus they are entitled for company’s profit as well bear the loss.

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Understanding the Concept of Shareholders

A share in a company represents the units in which the total capital is been divided. In simple words, it’s fractioning the whole paid-up capital into small units to raise the capital for the company. The portion or part of money contributed by a person to make up the capital is known as shares and the contributor towards this unit becomes the shareholder.

Shareholders are otherwise known as the member of company under the Act.

Section 2(55) – Definition of Members in relation to a company –

  • The subscriber to the memorandum of the company, who shall be deemed to have agreed to become a member of the company and on the registration, is to be entered as a member in the register of the members.
  • Every person who agrees in writing becomes a member of the company where the names are entered in the register.
  • Every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.

Case Laws

  • Vijay Kumar Narang vs Prakash Coach Builders, 2005 held the name must be entered in the register when a person becomes the member for the first time and not applicable on those who brought share previously.
  • Commissioner of Income Tax Vs. Standard Vacuum Oil Co. held a share is nothing but a part of share capital of a company and includes stocks except where a distinction been placed stocks and shares either be it expressed or implied.

What are shares?

Shares can be classified as

  • Equity shares These shares are ordinary shares and the shareholders are entitled to a share in the profit made or surplus profit for the subsequent year only after paying the preference share holders.  The same is applicable during the time of winding up, the equity shareholders gets their invested capital only after setting off with the creditors and preference share holder.
  • Preference shares The preference shares are a part of issued share capital which carries preferential rights. They have a preferential right with regards to the return of capital during the time of liquidation of the company.

What is allotment of shares?

Share allotment is nothing but creation and issue of new shares either in the market (NSE & BSE or other registered stock exchanges) or to the existing share holders by the company. Application and distribution is governed by Companies Act, 2013 and regulation incorporated therein. By purchasing the allotted shares one becomes a shareholder.

Modes of Allotment of Shares

Mode of allotment of Public Company Mode of allotment of Private Company
  • Public offer (issue of prospectus)
  • Private placement
  • Rights issue and bonus issue
  • Bonus share
  • Private placement or preferential allotment

How to become a Shareholder?

One may become a shareholder in a company in the following ways

  1. By subscribing to the memorandum (Section 2(55)(i))
  2. By allotment
  3. By transfer
  4. By transmission
  • By subscribing to memorandum: The Act paves way for the investors who have subscribed to the memorandum of association of the company to be considered and deemed to have agreed to become the shareholder/ members of the company and on registration, the member shall be entered in the register of the shareholder
  • By allotment: Any person can apply for shares in the response to the invitation for subscription on reading a prospectus. The application has to be made in the prescribed format and fees as stated therein.
  • By transfer: Shares have to be transferred legally by the shareholder transferor in favour of the transferee who intends to buy the shares. Until the transfer is made in writing in the prescribed format containing the signature of the transferor and the transferee the transfer stays void and thus transferee can’t become a shareholder.
  • By transmission: Shares cannot be transferred in the name of the legal heirs in the events of death or incapacity of the shareholder to get a succession over the shares. Thus the legal heirs have to apply to the company with the request to change the share certificate in their name. For executing the same the death certificate of the shareholder and legal heir certificates of his/her kin has to be produced as evidence.

Eligibility to become a shareholder

  1. Minor
  2. Hindu Undivided Family
  3. Company
  4. Partnership Firm
  5. NRI/ FDI/ GDR
  6. State/ Central government
  • Minor – Though a minor is not qualified to get into contract or agreement as to its considered ab-initio. Thus becoming a shareholder is void. But, Section 11 (Indian Contracts Act, 1872) and Hindu Law however allow an accepted guardian to act on behalf of the minor by permitting the guardian to enter into legal obligations until the minor attains the age of majority. Hence, a minor with an appointed guardian either by court or contract can purchase shares from the listed company as it would validate the minor as a shareholder.
  • Hindu Undivided Family: A HUF is considered as an individual person who is registered and acts as a juristic person for all-purpose. In the case of HUF purchasing shares, it could be done in the name of KARTA (head of the family). Thus even a HUF is entitled and eligible in becoming a shareholder by purchasing shares from the company.
  • Company: Any company can become a shareholder of another company but it is subjected to the approval of the Board of Directors and the same has to be passed in a resolution. Further, the company can be a shareholder only the Memorandum of Association authorizes for investment. Being in terms with the MoA the company has to pass a resolution must consisting of the name of the company, the amount involved in such purchases, consent of the members to be recorded and signed. Also, a company can’t buy its own share Section (68 and 70).
  • Partnership firm: Until and unless the partnership firm is registered it’s neither a legal entity nor a person. Partnership firms apart from the status of being individual, the constituting firm has no rights. Thus an individual in the partnership can be a shareholder of the company.
  • Trade union: A trade union registered under the Trade Union Act, can be registered as a member and can hold shares in a company in its own corporate name.
  • Foreigner: A foreigner can purchase the share outside India from ADR/ GDR which is governed under FEMA guidelines.
  • State Government and Central Government: State and central government can become a shareholder of a company through the approval of the President of India in the case of central and the Governor in the case of State. The Act gives the liberty of making an appointment by nominating any person to represent the meeting of the company.

shareholder of company

Conclusion

Shareholders and the Directors hold a huge impact and are a vital part in discharging their duties for the effective running of the company. Being a part of a company by holding a share gives the shareholder a right to certain things (depends on the nature of the share) thus Any person (who’s capable of entering into legal conscience) can acquire shares from a company by applying and owning shares by subscribing through listed stoke exchange. Keeping the capacity of the person the Act has given brief exemptions for all individuals, be it a minor or joint holder or trade union.  The categories mentioned above are entitled and eligible to become a shareholder in the company and perform their right and duties towards the growth of the company and economy.

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Neelansh Gupta is a dedicated Lawyer and professional having flair for reading & writing to keep himself updated with the latest economical developments. In a short span of 2 years as a professional he has worked on projects related to Drafting, IPR & Corporate laws which have given him diversity in work and a chance to blend his subject knowledge with its real time implementation, thus enhancing his skills.

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