Who can become a Shareholder in a Company?

Members of a Company 

In ordinary commercial usage, the term ‘Member’ denotes a person who holds shares in a company. The shareholders are the real owners of a company. They collectively constitute the company as a corporate body. 

The ultimate authority in matters relating to the appointment and removal of the directors, auditors, and other managerial personnel lies with shareholders. The powers of the Board are also subject to the control and supervision of the general body of the members. 

Meaning and Definition 

The Companies Act divides the members into three classes. According to Section 41 of the Companies Act, the three classes of members are: 

1. The persons who have subscribed to the Memorandum of Association of a company. 

2. Every other person who has agreed in writing and whose name has been entered in the Register.

3. Every person holding an equity share of a company and whose names are recorded as a beneficial owner in the depository.

Who can become a shareholder? 

Shareholders are also known as the members of a company. Under the Companies Act, 2013, any person can become a member and a person could mean an individual, body corporate or an association. 

The company law does not prescribe any disqualification, which would debar  a person from becoming a shareholder of a company.  

It appears that any person who is competent to enter into a valid contract (as per the Contract Act, 1872) can become a member of a company. Subscribing for shares is a contract between the company and the shareholder.  

However, the MOA & AOA may restrain certain persons from acquiring membership in a company. In the absence of any express provision about the capacity of a person, the provisions of the Contract Act will apply. 

With regards to the certain special categories of persons, the judiciary has laid down some principles for acquiring membership in a company. They are as follows:

Company

A company may become a member of another company  if it is authorized by its MOA or AOA, or if it takes the shares of another company by way of a Compromise or Arrangement. 

A company cannot, however, buy its shares. Also, subject to some exceptions i.e., a company cannot buy shares of its holding company. 

Limited Liability Partnership

LLP registration is a way to create a legal organization that can hold assets and properties on its name. It can become a shareholder of a company by agreeing to the MOA of the company or by the subsequent purchase of shares in the company.

Hindu Undivided Family

A HUF is considered as a person but not a juristic person for all purposes. Shares of a company can be registered in the name of Karta (head of HUF). Hence, an HUF can become a member of a company. 

Firm

A partnership firm cannot become a shareholder of a company, since  it is not a legal person having a separate entity from that of partners. Partners can be registered as joint holders in which case each of them becomes a member. 

Joint Holders

The shares of a company can be held jointly by two or more persons. As per Companies Act, 2013 in the case of a public company every joint shareholder is counted as a separate member but in the case of a private company, joint holders are treated as a single member. 

Registered Society

A society registered under the Society Registration Act, I860, can hold shares in a company in its own name if it is so authorized by its MOA & AOA. 

Insolvent

An insolvent may be a member of the company although the beneficial interest in his shares will be with the Official Receiver. He does not cease to be a member of becoming insolvent unless provided otherwise by the articles of association. 

Minor

A minor or lunatic, being incompetent to enter into a contract cannot become a member of a company. But a guardian can become a shareholder on behalf of the minor. If directors, in ignorance of the fact of minority, allot shares to a minor, and enter his name on the register of members, the company can reject the allotment and remove his name from the register, when the fact of applicant’s minority comes to its information.  

The minor can also repudiate the allotment of shares at any time during his minority. In either case, the company will repay to minor all money received from him for  the allotted shares, and whether or not the minor should restore to the company the benefits he might have derived from the shares would be for the court to decide given the facts and circumstances of each case. 

Foreign National / NRI

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

State or Central Government

Any of the SGs or the CGs can become a shareholder of a company through the President of India or the Governor of a state. The Act states that either President or Governor could nominate any person to be present at any meeting of the company.  

The person selected 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.