What is a Bearer Shares: Meaning, Risk and Advantages

What is a Bearer Shares: Meaning, Risk and Advantages

A bearer share in the share market is an equity ownership wholly owned by anyone who holds the physical share certificate. The issuing firm neither registers the ownership of shares nor tracks ownership transfers. When a physical share certificate is presented, the company disperses dividends to bearer shares. The transfer of ownership of the shares involves only the delivery of the physical document because the shares are not registered with any authority.

Let’s read this article ahead and understand the bearer shares meaning, risks, advantages, and how they work.

Bearer Shares Meaning

Bearer shares are unregistered securities whose owners have a physical share certificate as the only evidence of ownership. The holding company issuing bearer shares does not consider it necessary to register them as holders or record their transfer of ownership. Only when a physical share certificate is presented will it be held responsible for paying dividends to the shareholders.

Asset protection could be one of the most common reasons for using bearer shares. It's high because, unlike any other, these shares offer better privacy options. Individuals not ready to assume the risks associated with their assets being seized due to court proceedings like divorce, liability suits, etc., may choose to participate in bearer shares.

Although several risks are associated with bearer shares, the authorities have difficulties tracking money flow and investigating illegal activities since the owner's identity is not registered. In the past, more shares have been provided to facilitate illegal operations, leading to excellent regulatory monitoring of shares.

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Table of Content

  1. Bearer Shares Meaning
  2. How Do Bearer Shares Work?
  3. Risks Associated With Bearer Shares 
  4. Advantages Of Bearer Shares
  5. Conclusion

How Do Bearer Shares Work?

In practice, the working procedure for bearer shares is quite simple. In addition to owning the underlying stock, the holder of the bearer share certificate is entitled to all the rights and benefits of owning the share. The holder will have to present the physical share certificate to the company at the time of dividend distribution so that it can receive dividends.

The purchase and sale of the bearer shares are also effortless since there is no requirement to record an official transfer of ownership. Like any physical asset, the share certificate may be bought and sold without charge or given as a gift. The bearer shares can be used to one's advantage because of their unique and confidential nature. However, it should be noted that drawbacks and significant risks accompany the bearer shares.

Risks Associated With Bearer Shares 

Although the benefits and legitimate uses of bearer shares are available, many disadvantages and risks may arise, such as:

Evidence Of Ownership Issues

In some cases, such as if the company wished to open subsidiaries and bank accounts in a foreign country, it would require shareholders to provide proof of ownership. Nevertheless, as individual names do not appear on the certificate, many States will refuse to recognize a holder's share certificates as proof of ownership.

Tax Implications

Finding fair means of reducing a person's tax liability is much more advantageous. The problem with bearer shares can be challenging due to inadequate record-keeping. As a result, there may be more tax complications and traps in bearer shares than in the past, and the cost of hiring a professional to deal with them can be high.

Theft Or Loss 

The bearer shares are highly at risk of theft or loss. That is because the ownership of a share certificate can only be determined physically, and no records have been kept regarding its rightful owner. Likewise, the owner shall not be able to recover its share certificates when they are lost or damaged due to unforeseen situations.

Issues With Opening Bank Accounts For A Company

Banks are usually unwilling to accept companies that have issued bearer shares due to the tracking problem of the company's ownership. The risks to the Bank are not known or acknowledged. As a result, it is difficult to find banks willing to open accounts for companies that continue to issue bearer shares, and the number of banks accepting such companies is decreasing.

Advantages Of Bearer Shares

The advantages of bearer shares are as followed;

Convenience

The advantage of bearer shares is that they are effortless to transfer between owners. As physical possession of a share certificate is the only condition for demonstrating ownership, shares can be transferred by physically handing them over to their new owner. This brings several benefits, especially the return of confidentiality, increased liquidity, reduced burden on the administration and no transfer costs.

Privacy

The high level of protection offered by bearer shares is the main advantage. No one can and will follow the name of a shareholder. No registration agents, law firms, banks, or anyone else. Even when the owner's name of a bearer share is initially recorded, keeping track of ownership transfers is impossible, ensuring complete anonymity for the current owner. Moreover, determining how an individual acquired the share certificate does not fall within a company's or its owners' responsibility. The right to it, regardless of the method by which they obtained it, is conferred upon someone who submits a physical document.

Conclusion

Bearer shares have been a part of the history of offshore finance, even if some have misused them. This type of stock has indeed been used for legitimate purposes and benefits. They are, however, rapidly becoming extinct. In addition, the risks are considerable even if those shares could still be legitimately used.

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Bearer Shares FAQs

Consequently, there have been restrictions or bans on the ownership of those shares in many countries worldwide. Holding such shares is not permitted in India's legislation.

Despite their inherent drawbacks, bearer shares have some valuable uses. The most common reason for using bearer shares is to protect assets because they are protected by confidentiality.

Despite their inherent drawbacks, bear shares have some valuable uses. The most common reason for using bearer shares is to protect assets because they are protected by confidentiality.

When shares are dematerialised, physical certificates—both bearer and registered share certificates—are retired from the market and replaced by electronic data.
 

The rules and controls do not apply to bearer shares due to the lack of a record of ownership. Fixed-income bearer bonds belong to real certificate holders rather than registered owners.