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Listed company  and Section 112 of the Companies Act, 1956 – By CS A Rengarajan and CS  Alok Rudra

 

Introduction:: Section112 of the Companies Act, 1956 enables the seller either to sell entire shares to different persons or keep some balance within him by way of certification done by the company. To split the shares, we need to pass board /committee resolution. Normally the sub division of shares will take longer time i.e. minimum 2 -3 months i.e. passing of board/committee meeting and signing and dispatching of the same. In order to avoid delays, the government has inserted the section to benefit of the investors.

Applicability of the Section :   Section 112 of the Companies Act  1956 provides certification of transfer. This provision mainly applicable to listed entities.   This section is applicable only when shares are traded on physical mode.  With regard to closely held companies, the sale and purchase took place and there is no third party i.e. broker involvement.  The shares can be sub divided and transferred subsequently. By and large this section will mainly for listed entities whose seller and buyer are not on the same locations. 

Basically certification means when a seller sells his shares to different purchaser, it is not possible for him to provide share certificate to all the purchasers.  Suppose if a seller is having 500 shares and he has sold  100 to 2 persons and 50 to 3 persons.   In this regard it is not possible for him to give share certificate to the purchasers.  The buyer broker will not accept mere transfer instrument.  The seller broker will present the transfer or transfers duly executed by a seller accompanied by share certificate with a request for certification.      

Example 1:  If X is having 100 shares and he sells the same to Y  50 shares  and Z  50 shares. But he don’t want to hand over the share certificate to both.  Alternatively he can  deposit with the company and the secretary  certifies the transfers ( before the same to be handover to the transferee i.e. purchaser or his broker)  by stamping in the margin of certificate  and signing the same.

Example 2:  If X wants to sell partial shares to third party and balance he would like to keep himself.  This certification will also enable him to keep the balance.

Before certification, the secretary or registrar to the shares verify the certificate and then certify the same.  If the contents are not in order, then he has got every right to refuse to certify the same.

Fraudulent certification: According to  sub section (2) of Section 112 provides  If false certification done by the company inadvertently or negligently, then the company is liable to that person for the loss sustained by him. The certification process is one where secretary or authorized person to vigorously follow the same until the effect of transfers is over.

Sub division of shares: According to clause (a) of sub section 3 of Section 112 provides that  an instrument of transfer  shall be deemed to be certified , if it bears  the words certificate lodged or words to the like effect.  It means no need for sub division of shares under this sections once the company acknowledge certification of shares.

Present Sceanrio: Nowadays almost all the shares are in demat form after the introduction of Depositories Act, 1996 w.e.f  26th September 1995.  This section is OBSELETE after introduction of Depositories Act, 1996. The shares are in any denomination transferred to others through demat form. The seller and buyer are in the demat holdings to enable them to sell even a single shares. The concept of certification of transfers will be obselete after the existence of demat mode of holding shares. The question relating certifications of transfer are asked in all professional exams in these days.

Conclusion: This section is not in use for the last 50 years and more than 25 amendments came in Companies Act, but the government not in a position to carry out necessary amendments or deleting this section.  

Whether we need to wait upto passing of Companies bill 2009?

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Category Corporate Law, Other Articles by - cs A Rengarajan 



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