Share – an abstract God

There is a common property of the God, Rupee and Shares? I replied. The question was how a share look like. Though it may be hard to believe but these three have an ultimate abstract only. You can see an idol of the God or gods, a note of one rupee or more rupees, a certificate of one or more shares, never the God, Rupee and Share (in a normal life). We will discuss a share in following paragraphs.

The story start with the requirement of blessings of most modern god: the capital or money. The amount we invest in a business is called capital. but in a modern business requirement of capital is huge which is therefore collected from a group forming a formal form of a company.

The capital may be contributed in two forms:

  • either defined in percentage terms; or
  • in a unit terms.

The first of these above two is called the stock – every one have own percentage. This give birth of joint stock companies and to facilitate them stock markers. [Note: these terms are in habitual use till today]. Stock has their own limitation to have in percentage. Think to have a joint stock company with few thousands crore capital contributed by a population roughly similar to NCT of Delhi. How much percentage of stock you may have? how to value of each contributory to the stock. Partnership firms still have capital contribution in percentage terms.

The second one is now popular – companies having share capital. These companies have few lakh crore units of share defined in its face value of Re. one. This unit or say Share system have few other benefits – uncalled capital and partly paid shares. Though, practice of having partly paid share or uncalled capital is now not a usual practice. Law particularly for trading on share market discourages partly paid shares. I am not going to discuss other socio-economic reasons for not preferring partly paid shares.

These units have no shape, figure, form or even a single dimension existence outside imagination and books of account. To define them, we numbered (their name in mathematical language) these units on paper of the register of shareholders. To communicate and proof ownership of these shares, a company issue share certificates. For many years, we tends to believe these share certificates are shares as we assume 10 rupee note is a 10 rupee. We assumed the material form of these abstracts too much well.

Alas, we thereafter de-materialized these shares. This is a 21st century myth even believed by the Law and law makers. No Joke. This is power of imagination and collective believe. 

What we did, in place of numbering just mention numbers one owe in the passbook – an electronic passbook.

The transition may really be very smooth if we consider it as obvious as transition towards hard cash and cash in bank. (just to enjoy – plastic money is also a fake modern term.)

Everything related to share is similar with Rupee except no king ever thought to number any unit of money. but numbering of share units was required to check fake issue of certificates and uncontrolled issue of shares or share certificates. This cause strong assumption of physical existence of shares.

What the change so called de-materialization of share did?

Earlier Company A had 10,000 shares of Re. 1 having distinctive number 1-10000 for a share capital of Rs. 10,000/-. Now, a company A, simply has Rs. 10,000 shares of Re. 1 for a share capital of Rs. 10,000/-.

But old practice and habits die hard. Companies still use to issue shares with distinctive numbers and discard numbers for record maintained on electronic share registries called depositories.

Some companies may have shares with distinctive number 1-10,000 recorded on a physical share certificate (called physical shares) and shares with distinctive number 10,001-10,00,000 recorded on electronic registry where neither company nor holders know which numbers he hold. When such shareholder wants a physical  certificate, the company starts numbering his certificate with next number written in earlier share certificate.

However, new laws will soon discard share certificates in favor of electronic registry.

PS: Everything discussed herein above is also true for debentures, bond units and mutual fund units.

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