Shares issued in the name of unnamed bearers are known as bearer shares. The issuing company isn’t aware of the owner’s identity. Let’s find out more about these shares.
When you buy shares, the company gives you a proof of your purchase in the form of a receipt, which may be treated as a digital share certificate. Since 1996, the SEBI made it mandatory for investors to open DEMAT accounts to maintain their market instruments while abolishing physical share certificates. Yet, some people possess these certificates from investments, either made before the SEBI mandate while others do not have their names imprinted on the share certificates. People who don’t have their names imprinted on share certificates are known to own bearer shares.
What are bearer shares?
These are equity securities which are entirely owned by individuals or entities that hold physical share certificates. These shares are typically issued to an “unnamed bearer”. The shareowner is not registered nor does a company track if the ownership is transferred from the original owner to another buyer. Owners of these shares can transfer the same on exchanges as well as over-the-counter, and can also acquire proprietary and membership rights on purchasing the shares.
Bearer shares and proof of ownership
Since bearer shares are primarily unnamed, owners can get their proof of ownership through the banks or brokerage houses handling the purchase. Banks and brokers also play an integral role in paying dividends to the bearer shareholders, since they, and not the share-issuing company, possess the details of the buyer. Apart from confirming the share ownership, custodian banks also provide details regarding annual meetings, dividend pay-outs, etc., on behalf of the company issuing the shares. Furthermore, restricting the transferability of these shares is almost impossible since the shareholders are, by definition, unknown or anonymous.
Advantages of bearer shares
1. These shares provide complete privacy to the owners
The most tangible benefit is that owners can have complete privacy. Bearer shareholders can get the highest degree of anonymity concerning the ownership of shares in a company. While banks handling the purchases are aware of the owners’ contact information, in most jurisdictions, they are not legally obligated to disclose the purchasers’ identities. Furthermore, investors can make their purchases through different representatives, such as the actual owner’s law firm.
2. These are easy to transfer
Another core benefit of owning these shares is that you can transfer them easily. You can hand them over to the individual interested in buying the shares. When you sell these shares, you are not required to transfer inscriptions on the certificate of shares. You can conveniently transfer all the relevant rights by physically transferring the share certificate to the buyer or even an heir. This process of smooth transfer decreases the stock-providing company’s administrative burden and also enables increased liquidity in the capital markets.
Bearer shares – legal ramifications in India and across the world
While bearer shares afford privacy and are easy to transfer, they are also deemed notoriously unsafe, especially if they fall into the wrong hands. As such, many countries across the world have either restricted or imposed bans on owning these shares. Under Indian legislation, ownership of these type of shares is not permitted. However, since you can invest in stocks across the world, you can buy these shares in several European and South American countries, but you may have to incur additional costs.
Like with every investment, bearer shares too have merits and demerits. You must assess these before investing. For more information, reach out to an Angel One Expert.