Bearer Shares: Definition & Benefits

Key Highlights:

• Bearer shares are not registered under the holder’s name in the company’s records
• They offer anonymity
• They also offer transferability and enhanced liquidity
• Seek professional and legal help before investing in these shares

Bearer shares are unique financial instruments that have intrigued investors for a long time. These securities give ownership and control to whoever owns them, unlike registered shares, which have a single owner.

What are bearer shares?

Bearer shares’ definition says they are certificates of publicly traded companies not registered under the holder's name in the company's records. Owners of these shares only have physical certificates as evidence of ownership. As these shares are not registered, the transfer of stock ownership involves the delivery of physical documents.

Advantages of bearer shares

Bearer shares offer the following advantages:

• Anonymity

Bearer shares offer anonymity as ownership is determined through actual share certificates. The holder's identity remains confidential as ownership is not recorded in any official register.

As the identity is not recorded, you can conduct transactions efficiently without the fear of your physical information being accessed by unauthorised parties.

• Transferability

Bearer shares offer a high degree of transferability. Ownership can change hands by a simple exchange of share certificates. There's no need for cumbersome administrative processes or approval from the issuing company, which facilitates quick and efficient transactions.

This quick transfer is quite helpful in fast-paced financial environments, where speed and agility of transactions are crucial. Bearer shares facilitate smooth market operations, whether buying, selling, or transferring ownership.

• Enhanced liquidity

Because of their very nature, bearer shares are highly liquid. As they can be easily transferred without extensive administrative processes, it broadens the pool of potential buyers and sellers.

This boosts the chances of getting the required counterparties for transactions. As a result, you can easily convert them into cash when needed.

• Reduced transaction costs

Thanks to the ease of transfer of bearer shares, transaction costs are reduced compared to registered shares. As there's no need for intermediaries to maintain or facilitate ownership, transaction costs are lower. This leads to more frequent trading, thereby boosting liquidity.

Disadvantages of bearer shares

While bearer shares offer the benefits mentioned above, it is important to note that the ownership of such shares is not permitted under Indian law. These shares come with certain disadvantages, including:

• Risk of theft

As bearer shares are in physical form, they run the risk of being stolen. If it happens, you may lose your investment, resulting in significant losses.

• Illicit usage

As bearer shares are unregistered securities, they present significant risks for illicit usage. They are susceptible to misuse in illegal activities like money laundering and tax evasion. As a result, they are subject to tighter regulatory oversight in certain jurisdictions.

In conclusion

While several inherent qualities of bearer shares set them apart, over the years, the number of financial institutions dealing with them has decreased drastically because of their risks. Also as per Indian law, bearer shares are not permitted.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI prescribed Combined Risk Disclosure Document prior to investing. Brokerage will not exceed SEBI prescribed limit.