Understanding Stock Certificates and Their Purpose

Summary:  

Stock certificates are physical certificates that represent your ownership of stocks purchased. Before digitalisation, companies issued physical certificates to investors with their name, number of shares purchased, amount of money spent on buying shares, company’s registered address, and corporate identification number.

Digitalisation has profoundly impacted several aspects of our life, including stock market investment. Today, you can invest in shares in a few easy clicks, and the shares purchased are transferred to your Demat account. 

However, before the Internet and digitalisation revolution took over the world, companies used to offer physical stock certificates. These certificates acted as proof of ownership of the stocks purchased.

Understanding stock certificates

Before digitalisation, buying and selling stocks would happen over the phone or in person. There was no involvement in computerised trading systems. To purchase a firm's stocks, you needed to call your broker, who would purchase on your behalf. Once purchased, the company would issue physical certificates that acted as purchase receipts and indicated your stock ownership.

Details present in stock certificates

A stock certificate had the following details:

• Name of the issuing firm
• Registered address of the company
• Corporate identification number (CIN)
• Shareholder’s legal name
• Number of shares purchased
• Amount of money spent to purchase the stocks
• Folio number

These certificates were printed on specially prepared paper with intricate designs, much like paper currency. It was done to ensure their safety so that nobody could counterfeit them. Companies used to get creative while issuing stock certificates with their logos, illustrations, and watermarks.

Importance of stock certificates 

Stock certificates were valuable in the following manner:

• Acted as the proof of ownership

Stock certificates acted as your ownership of a company’s stocks. This proof of ownership established and protected your rights as an investor in the company.

• Facilitated buying and trading of stocks

Stock certificates helped in buying and selling stocks in the stock market. Also, you could transfer ownership of your stocks to another person through them.

• Helped in ownership control

For larger investors, stock certificates were a valuable tool for asserting control and influence over a company. Accumulating many certificates allowed them to propose company policy changes or elect board members.

• Gave legal rights to investors

Holding stock certificates gave you, as an investor, certain legal rights. These included attending annual general meetings (AGMs), voting on essential corporate matters, and receiving dividends. These rights played a vital role in influencing a company’s decision and participating in its governance. 

• Acted as a historical record

Stock certificates acted as a historical record of your holdings. This record was valuable for taxation purposes and evaluating an investment's portfolio's performance over time. Additionally, these certificates represented your stakes in a company’s assets and earnings. A rise in profitability resulted in the rising value of the certificates.

• Could be used as collateral for loans

Stock certificates acted as collateral for obtaining loans. You could pledge them as security to your lender and borrow money against your stock holdings. Thus, they provided liquidity without the need to sell your shares.

Limitations of stock certificates

Some limitations associated with stock certificates were:

• Security issues

Being physical documents, stock certificates were prone to damage and theft. This resulted in security issues, and obtaining duplicate certificates was time-consuming.

• Transfer delays

Transferring ownership of physical stock certificates involved extensive paperwork. This made it challenging to execute quick transactions.

• Limited access

Physical stock certificates required secured storage facilities, which limited their access. This limited market participation to a broader population. 

• Challenging to manage corporate actions

Not only investors, but stock certificates also posed certain difficulties to companies. They found managing corporate actions like stock splits, mergers and acquisitions, etc., challenging, leading to administrative complexities. 

• Delay in receiving dividend payments

Investors needed to post physical certificates to a company’s registered address to receive dividend payments. This caused delays in receiving dividend payments. 

Complying with know-your-customer (KYC) norms 

If you hold physical stock certificates, you need to comply with KYC norms by 30th September 2023. You need to provide PAN, nomination, bank account details, contact number, and specimen signature to your registrar and transfer agents. Failure to do so will result in your folio being frozen after 1st October and you will not be eligible to receive bonus, dividends and other corporate actions.