Becoming a shareholder of a company is one of the best ways to align yourself with the success of the company. Whether you are an investor looking for some return on your investment or an employee awarded shares in a compensation package, you have rights as a shareholder and part of those rights are financial rights that accompany the ownership of equity in a company, as well as a right to input in decision-making within the company.
However, what are the steps to becoming a shareholder? Is it really just a matter of buying shares? Or are there legal and procedural matters to consider?
This article will break down what a shareholder is, the multiple ways to acquire shares, the legal ways to become a shareholder and the rights and obligations of shareholders in India.
Who is a Shareholder?
A shareholder is an individual or entity that legally owns one or more shares of a company’s stock. The share represents a unit of ownership, giving the shareholder a proportional claim on the company’s assets and profits.
In simple terms, if a company has issued 10,000 shares and you own 1,000 of them, you hold 10% ownership of that company.
Shareholders can be:
- Individual investors
- Institutional investors (mutual funds, insurance companies, etc.)
- Founders or promoters
- Employees (through ESOPs)
- Foreign investors or companies
Types of Shareholders
- Equity Shareholders
Equity shareholders are the primary owners of the company. They have voting rights and a share in profits (dividends), but they bear the highest risk if the company performs poorly.
- Preference Shareholders
Preference shareholders enjoy priority in dividend payment and repayment of capital in case of liquidation, but they usually don’t have voting rights.
Ways to Become a Shareholder in a Company
There are several ways to acquire ownership in a company, depending on whether it’s listed (public) or unlisted (private).
1. Buying Shares in a Public Company
If the company is listed on a stock exchange like the NSE or BSE, the easiest way to become a shareholder is by buying its shares through the stock market.
Steps:
- Open a Demat and Trading Account: You must have a Demat account (to hold shares electronically) and a trading account (to buy/sell through a broker).
- Choose a Broker: Register with a SEBI-registered stockbroker or online trading platform such as Zerodha, Upstox, or Groww.
- Research and Select the Company: Analyze the company’s financials, performance, and market trends before investing.
- Buy Shares Online: Log into your trading platform, enter the stock name, specify the quantity, and place a “Buy” order.
- Become a Shareholder: Once the trade is executed, shares are credited to your Demat account within T+1 day (the next working day). You are now a legal shareholder.
2. Subscribing to Shares in a Private Company
In private limited companies, shares are not traded publicly. You can become a shareholder only through direct allotment or transfer.
Ways to acquire shares:
- Through Fresh Issue / Allotment: When a company issues new shares (e.g., during funding rounds), investors can apply and receive shares directly from the company.
- Through Transfer of Shares: An existing shareholder (promoter or investor) can transfer their shares to you via a share transfer deed (Form SH-4).
Process for Private Companies:
- Sign a Share Purchase or Subscription Agreement: This document defines the terms of purchase — number of shares, price, rights, and restrictions.
- Board Approval: The company’s Board of Directors must approve your induction as a shareholder through a board resolution.
- Payment and Share Allotment: Pay for the shares (usually via bank transfer), and the company issues a share certificate within two months of allotment.
- Update in Register of Members (ROM): Your name is entered in the company’s official register maintained under Section 88 of the Companies Act, 2013. This formally recognizes you as a shareholder.
- Filing with ROC: The company must file Form PAS-3 with the Registrar of Companies (ROC) within 30 days of share allotment.
3. Employee Stock Option Plans (ESOPs)
Many startups and private companies allow employees to become shareholders through ESOPs Employee Stock Option Plans.
Under ESOPs, employees are granted the right (but not obligation) to buy shares at a predetermined price after completing a vesting period.
Steps:
- Employee receives ESOP grant letter.
- After vesting, the employee exercises the option by paying the exercise price.
- The company allots shares and issues a share certificate.
- The employee’s name is added to the shareholder register.
ESOPs are a great way to align employees’ interests with the company’s growth and reward loyalty.
4. Investing in Startups or Unlisted Companies
You can also become a shareholder by investing in startups or unlisted companies through:
- Private placement
- Angel investing
- Crowdfunding platforms
- Venture capital rounds
Legal Requirements and Documentation
When you become a shareholder, certain legal documents are issued or updated to record your ownership.
| Document | Purpose |
| Share Certificate | Proof of ownership of shares issued by the company. |
| Share Transfer Deed (Form SH-4) | Used when shares are transferred from one person to another. |
| Board Resolution | Approves allotment or transfer of shares. |
| Register of Members | Official record of all shareholders. |
| Form PAS-3 / MGT-7 | Filed with ROC for share allotment and annual return. |
These ensure that the ownership change is legally valid under the Companies Act, 2013.
Rights and Responsibilities of Shareholders
Becoming a shareholder gives you several rights but also responsibilities.
Rights:
- Right to vote in shareholder meetings.
- Right to receive dividends, if declared.
- Right to inspect books and financial statements.
- Right to transfer shares, subject to company restrictions.
- Right to participate in surplus on liquidation.
Responsibilities:
- Pay the full value of subscribed shares.
- Follow company rules and shareholder agreements.
- Maintain updated KYC with the company or depository.
- Report capital gains and dividends in tax filings.
Tax Implications of Becoming a Shareholder
Dividends are taxable in the hands of shareholders at their applicable income tax slab.
Capital gains arise when shares are sold:
- Short-term (held <12 months): taxed at 15%
- Long-term (held >12 months): taxed at 10% on gains above ₹1 lakh
Always maintain proper records of share purchases and sales for tax compliance.
Exit or Transfer of Shares
Shareholders can exit their investment through:
- Selling shares in the stock market (for listed companies)
- Private share transfer (for unlisted companies)
- Buyback of shares by the company under Section 68 of the Companies Act
Transfers are governed by the company articles (AoA) and may require board approval.
Conclusion
Being a shareholder is also an opportunity to engage with the company’s vision and strategy for growth. You might buy shares in a publicly listed company, invest in a startup, or become a shareholder with the company through employee stock option plans. Regardless of the method of obtaining equity in a company, you will have a transparent process based on the Companies Act, 2013 and the applicable regulations issued by the Securities and Exchange Board of India, SEBI.
After you have these shares or equity you will have economic rights as well as a voice in the governance and decisions at the company, so it is important you know and comprehend your shareholder rights and obligations, that you keep your company’s records current, and that you comply with any tax implications and registration procedures with the company, e.g., to become a member.
At this point and with a little research and “due diligence,” you will find that becoming a shareholder can be one of the smartest and most empowering steps you take in your business or investment journey.
