Who Can Become a Shareholder of a Company?

A shareholder, or member, is an individual or entity that owns a portion of a company through shares, representing a stake in its equity. The Companies Act, 2013, defines their rights and responsibilities, establishing them as the true owners of the business.

• Individuals: Any person who is of legal age (18 or older) and of sound mind, as per Section 11 of the Indian Contract Act, 1872, can become a shareholder. This is the most common type of shareholder.
• Legal Entities: A company, an LLP (Limited Liability Partnership), or a trust can hold shares in another company, as long as its constitutional documents, such as the Memorandum of Association (MoA) or the LLP agreement, allow it.
• Hindu Undivided Family (HUF): An HUF cannot hold shares directly in its name. The Karta, who is the head of the HUF, must hold the shares in their name.

NRIs and Foreign Nationals: Yes, an NRI (Non-Resident Indian) or a foreign national can become a shareholder of the company. However, they must comply with the rules of the Foreign Exchange Management Act (FEMA) and Foreign Direct Investment (FDI) policies.

We will explore the legal foundations established by the Companies Act, 2013, and the Indian Contract Act, 1872. We will also address specific nuances related to different types of shareholders and legal structures. By the end of this guide, readers will have a clear understanding of the legal requirements and practical considerations involved in becoming a company shareholder.

Categories of Shareholders

Shareholders can belong to different categories, each with specific eligibility rules, restrictions, and compliance requirements.

Category	Eligibility & Conditions	Examples
Natural Persons (Individuals)	Must be at least 18 years old and legally capable of entering into contracts.	Any adult individual investor, first-time entrepreneur
Indian Companies	Any registered company in India can hold shares in another company.	Reliance Industries Ltd., TCS Ltd.
Foreign Companies	Can hold shares in Indian companies, subject to FDI norms and sectoral caps.	Google LLC, Amazon Inc.
Partnership Firms	Partnership firms cannot directly hold shares.	N/A – individual partners hold shares instead
LLPs (Limited Liability Partnerships)	LLPs cannot hold shares in their own name.	Individual partners of KPMG LLP are investing personally
Trusts	Registered trusts may hold shares through their trustees.	Tata Trusts, Reliance Foundation
Societies / Co-operative Societies	Societies registered under the Societies Act can hold shares if permitted.	Housing Co-operative Societies, Farmer Co-operatives
HUF (Hindu Undivided Family)	Shares are held in the name of the Karta (head of the family).	Family-owned businesses like Birla HUF
NRIs / Foreign Nationals	Can invest in Indian companies under the Portfolio Investment Scheme (PIS) or the FDI route.	Non-resident Indians investing via ICICI Direct PIS
Government / Public Sector Units (PSUs)	Central and State Governments can subscribe to shares of Indian companies.	ONGC, SBI, LIC
Co-operative Banks / Financial Institutions	Can hold shares if authorized.	Saraswat Bank, NABARD
Mutual Funds / Insurance Companies	Large institutional investors can hold shares.	HDFC Mutual Fund, LIC Insurance
ESOP Trusts	Specifically formed for employee shareholding.	Infosys ESOP Trust, Wipro ESOP Trust

Legalities Under the Companies Act

The Companies Act, 2013, along with other laws and a company’s own rules, defines who can become a shareholder in India. The Companies Act, 2013 (Section 2(55)), along with other laws and a company’s own rules, defines who can become a shareholder, or member, in India.

• Incorporation of a Company: The Act outlines the types (like One Person Company) and the procedure for forming a company. It specifies the required documents, such as the Memorandum of Association (MoA) and Articles of Association (AoA), and the process for filing them with the Registrar of Companies (RoC).
• Separate Legal Entity: The Act establishes one of the most fundamental principles: a company exists as a separate legal entity, distinct from its members (shareholders) and directors. This means a company can own property, enter into contracts, sue, and be sued in its own name.
• Limited Liability: The Act grants shareholders the benefit of limited liability. Shareholders’ personal assets remain protected, and they owe the company’s debts only up to the unpaid amount on the shares they hold.
• Perpetual Succession: The company continues to exist despite the death, insolvency, or retirement of its members and operates until the law requires it to be wound up under the Act.
• Corporate Governance: The Act introduced several provisions to strengthen corporate governance. This includes regulations on the composition of the Board of Directors, the appointment of independent directors, and the establishment of committees like the Audit Committee.
• Simplified Procedures: The Companies Act, 2013, has made the company registration process more efficient and digital. The introduction of integrated forms like SPICe+ has streamlined the entire incorporation process, making it easier for entrepreneurs to start a business.
• Compliance and Reporting: The Act requires regular filing of annual returns, financial statements, and other documents with the RoC, imposing penalties for non-compliance. Shareholders—especially NRIs, foreign entities, and trusts—must also complete KYC (BEN-2, DIR-3 KYC) and disclose their Ultimate Beneficial Owner (UBO) details as per MCA and RBI rules.

Private vs Public Company Requirements

Private and public companies in India differ in ownership, compliance, and capital requirements. For Private Limited Companies, there is an additional requirement under the Commencement of Business. 

They must file INC-20A, which confirms that the subscribers to the Memorandum of Association have paid the minimum share capital.

Aspect	Private Limited Company	Public Limited Company
Minimum Members	2	7
Maximum Members	200	No limit
Directors	Minimum 2	Minimum 3
Paid-up Capital	No minimum requirement	No minimum requirement (earlier Rs. 5 lakh, removed in 2015)
Share Transfer	Restricted by Articles of Association	Freely transferable
Invitation to the Public	Cannot invite the public to subscribe to shares	Can invite the public to subscribe to shares
Commencement of Business	Can commence after obtaining the Certificate of Incorporation	Requires Certificate of Incorporation + Certificate of Commencement of Business
Statutory Meetings	Not mandatory	Mandatory statutory meeting and reports
Annual Filings & Compliance	Relatively simpler, fewer compliance requirements	Higher compliance requirements, including detailed disclosures
Stock Exchange Listing	Cannot be listed	Can be listed on recognized stock exchanges

Note: You should consult a professional to ensure compliance and proper documentation.

How to Become a Shareholder in a Company?

There are several ways to become a shareholder. Depending on your situation and the company’s rules, you can choose the most suitable method.

Step 1: Understand the Eligibility Criteria

Before you can become a shareholder, you need to ensure you meet the basic legal requirements.

• You must be legally competent, which means you are of legal age (18 or older) and of sound mind. Minors or people with an unsound mind cannot directly hold shares.
• If you are a company or an entity, your constitutional documents (like your MoA) must permit you to invest in other companies.
• Non-Resident Indians (NRIs) and foreign nationals are eligible but must comply with the regulations of the Foreign Exchange Management Act (FEMA).

Step 2: Acquire Shares

Once you know you’re eligible, you can acquire shares through a few different methods.

• At the time of Incorporation: One can become a shareholder when a new company is being formed by signing the Memorandum of Association (MoA). This means you agree to subscribe to a certain number of shares.
• Buying from the Market: For public companies, you can buy shares on a stock exchange. For a private company, you must purchase shares from an existing shareholder.
• Receiving Shares from a Transfer or Transmission: You can receive shares as a gift from an existing shareholder (a transfer) or through inheritance if a shareholder passes away (a transmission).

Step 3: Complete the Documentation and Legal Formalities

After acquiring the shares, you must complete the necessary paperwork to formalize your ownership.

• For transferring physical shares, a share transfer deed (Form SH-4) is executed as a legal record. For dematerialized shares, transfers are carried out electronically through the depository system.
• For a new company, your name is entered into the company’s records as a shareholder upon its incorporation.
• For any change in ownership, the company must update its Register of Members to reflect the new shareholder.

Step 4: Name Enrolled in the Register of Members

This is a crucial step that legally confirms your status as a shareholder.

• The company must enter your name into its Register of Members to show you are now an official owner.
• You cannot exercise your rights as a shareholder, like voting or receiving dividends if this step is not followed.

Step 5: Receive Your Share Certificate

The company will issue you a share certificate once your name is recorded in the Register of Members.

• This may be issued in physical or electronic (demat) form and serves as proof of your ownership of a specific number of shares.
• It is your official record of having a stake in the company.

Step 6: Exercise Your Shareholder Rights

As a shareholder, you now have specific rights and responsibilities.

• You can participate in company meetings, vote on important decisions, and receive a share of the profits through dividends.
• Your rights are now legally recognized, and you can fully engage with the company as an owner.

Final Thoughts

Becoming a shareholder in an Indian company is a flexible process, with eligibility extending to a wide range of individuals and entities. The Companies Act sets the broad framework, but a person’s ability to enter a contract, as per the Indian Contract Act, 1872, is also crucial. This is why a minor cannot directly become a shareholder. 

Entities like companies, LLPs, and even NRIs can also own shares, but they must follow specific rules and regulations. Understanding these legal requirements, especially with a foreign investor or when transferring shares, can get complicated. The documentation and compliance with rules like FEMA require careful attention to detail. Therefore, to ensure a smooth and legally sound process, it’s highly recommended to consult with a professional legal or corporate services expert. They can help you understand all the requirements and complete the necessary paperwork correctly, protecting your interests and ensuring full compliance.

Frequently Asked Questions (FAQs)

Can a company hold shares in another company?

Yes, a company can hold shares in another company, as long as the investing company’s own legal documents, such as its MoA, permit it.

What is the maximum number of shareholders in a private company?

The maximum number of shareholders in a private limited company is 200. This limit does not include past or present employee-shareholders.

Can a foreign national be a shareholder in India?

Yes, a foreign national can be a shareholder in an Indian company. However, they must comply with the regulations of the Foreign Exchange Management Act (FEMA) and Foreign Direct Investment (FDI) policies.

How do you transfer shares between shareholders?

To transfer shares, you must fill out and sign a share transfer form (Form SH-4), which is then given to the company along with the share certificates. The company then updates its records and issues new share certificates.

Can a startup have only two shareholders?

Yes, a private limited company, which is a common structure for startups, requires a minimum of two shareholders.

Can a minor be a shareholder?

Yes, a minor can hold shares that are fully paid up. However, a legal guardian must hold and manage the shares on their behalf. The minor takes control of the shares once they become an adult.

What are the types of shareholders in a company?

Shareholders can be individuals, companies, Hindu Undivided Families (HUF), or even NRIs and foreign nationals. Each type has its own specific rules and legal requirements.

What are the main rights of a shareholder?

Shareholders have several key rights, including the right to vote in company meetings, receive dividends, and inspect certain company records, as well as the right to a share of assets upon company liquidation.

Can a partnership firm be a shareholder?

No, a partnership firm is not a separate legal entity from its partners. Therefore, the individual partners of the firm must hold the shares in their personal names, not in the name of the firm.