Who can become a shareholder?

Shareholders are otherwise known as the members of a company. Under the Companies Act, 2013, any person can become a shareholder and a person could mean an individual, body corporate, an association or a company irrespective of its incorporation. In this article, we look at persons eligible to become a shareholder of an Indian company.

Minor

A minor is not qualified to enter into an agreement and thus a minor's contract is considered invalid. A minor has no legal ability to enter into a bond or authorize someone else on his behalf. However, under the Hindu Law, the accepted guardian is permitted to enter into a bond on behalf of the minor and such a contract would be obligatory. It is equally applicable for sale and purchase of a property. Hence, a guardian can enter into a share purchase transaction on behalf of a minor and the contract would be valid. Can minor become a shareholder?

Hindu Undivided Family (HUF)

A HUF is considered as an individual person but not a juristic person for all purposes. Shares of a company can be registered in the name of Karta as "xx HUF". Hence, a HUF can become a shareholder of a company.

Company

A company can become a shareholder in another company subject to the approval of the Board of Directors and passing of a resolution. A sample board resolution for purchase of shares in another company is provided below: “RESOLVED THAT the consent of the Board of Directors of the Company be and is hereby accorded for making an investment not exceeding to Rs._____________ (Amount in words) in the following company in one or more tranches, and on such other terms and conditions as may be mutually agreed between the both parties :

Name of the Company	Amount of Investment

"FURTHER RESOLVED THAT (Name of the person(s) authorized) be and are hereby severally authorized to do all such acts, deeds and things as may be required to give effect to this resolution.”

Partnership Firm

It has been held that a firm is not a person or legal entity distinct from the partners composing it, but merely a collective name of the individuals who are members of the partnership. Hence, a partnership firm is neither a legal entity nor a person. The partners in a partnership firm may become joint shareholders of a company and their names can be entered into the register of shareholders. A firm can also become a shareholder of a company if the partnership firm is registered.

Trust

A trust which has not been incorporated cannot be treated as a person, hence shares attained by a trust cannot be registered in its name. However, it could be registered in the names of one or more trustees. However, shares can be registered in the name of a trust or co-operative society, if it is registered. Hence, a registered trust or co-operative society can become a shareholder in a company.

Public Office

There is no provision in the Companies Act that shares of a company could be held in the name of a public office. The collector of Central Excise, the secretary to the Government etc. is not a legal entity. Hence, shares cannot be held in the names of such public offices. Thus, public offices are not allowed to become shareholder of a company.

Foreign National / NRI

A foreign national, foreign company or non-resident Indian can become a shareholder of an Indian company subject to Foreign Direct Investment (FDI) regulations and FEMA guidelines.

State or Central government

Any of the State Governments or the Central government can become a shareholder of a company through the President of India or the Governor of a state. The Act states that either President of India or Governor of a state could nominate any person to be present at any meeting of the company. The person so nominated could be considered as a shareholder of a company entitled to exercise rights and powers in the same manner the President of India or Governor of the State would have discharged as a shareholder.

Limited Liability Partnership

An LLP is a lawful organization holding assets and properties in its name. It can become a shareholder of a company by agreeing to the Memorandum of Association of the company or by subsequent purchase of shares in the company.

For assistance with incorporation of a private limited company, contact IndiaFilings.