What is Bearer Share?
Bearer shares are a type of unregistered securities whose owners have a physical share certificate with them. The company that issues bearer shares neither feels the need to register itself as the owner of the same nor tracks the transfer of ownership and is charged with the responsibility of paying out dividends to the owners of the share certificate when it is presented.
One of the most common reasons to take bearer shares into use could be asset protection. It is high because these shares provide better privacy options, unlike no other. For example,- individuals who are not willing to bear the risks of their assets getting seized due to legal proceedings like divorce, liability suit, etc., might opt for their participation in bearer shares.
Risks Involved in Bearer Shares
These shares may pave ways for money laundering, evasion of taxes, terrorism financing, and many other criminal activities. All these potential risks and threats associated with bearer shares ultimately killed this practice.
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Advantages of Bearer Shares
- Privacy: In the case of such shares, the company is not required to register itself, and as a result, there is no indication of the owner. The identification of the owner is next to impossible, even if the name was recorded at an initial stage. Neither the director, the entity, the chairman of the board, nor the officials of the entity have an obligation to question the circumstances in which the present owner has procured the certificate.
- Easy Transfer: These are easy to transfer. There is no requirement for transferring inscriptions on a share script concerning these shares that are sold. The owner of bearer shares can simply transfer all the rights to the entity by just transferring the certificate physically from the issuer to the buyer. All and all, this reduces the company’s administrative burden that doesn’t have to track every single transaction in the ownership of the shares.
- Enhanced Liquidity: It allows enhances the scope for leveraging the liquidity in the capital markets.
Disadvantages of Bearer Shares
- The ease of share transfer can also make it easier for opportunists to steal the shares. The shares may also get lost, broken, stolen, or misused due to ease of transfer. This issue makes the company vulnerable to various attacks like a hostile takeover, etc.
- They are always at the risk of getting robbed or lost since these belong to the one who has physical possession of the stock certificate.
- In most cases, losing shares could be a potential reason for losing the ownership of an entity.
- Lack of book-keeping with respect to bearer shares also makes it impossible to provide proofs pertaining to theft or loss, and this can be highly difficult for the ones who have already lost their shares and even for the ones who are willing to purchase shares but could not find any way to ensure that the shares are not stolen.
- There are a lot of communication issues involved in the case of these shares since there is a lack of record-keeping (registry), and also, the current owner of the same remains unidentified. For example- an entity is unable to notify its equity holders about the general meeting.
- Banking institutions also discourage entities that use bearer shares. It is because of the fact there is not even a single way of knowing that when the entity’s ownership can change and as a result of which, the bank will feel exposed to various unknown risks.
- The identity of the current owner remains unidentified as the same is not provided on the share certificate. This makes it difficult and almost impossible for somebody to provide proof of ownership of the bearer shares.
- The criminals and fraudsters have realized these loopholes and accordingly misused them for a longer period. Some fraudsters have even used them to avoid transfer taxes, fund terrorist activity, shield money laundering, etc.
- There were multiple tax problems associated with bearer shares, and as a result of which the fraudsters used this as a golden opportunity to evade taxes.
Bearer shares allow the privacy of the owner, ease of transfer, and help in the maximization of liquidity too. The name of the owner of these shares is mentioned as “the bearer.” These shares no longer exist as these have always been a challenge for tax authorities since fraudsters wrongly use these for tax evasion purposes.
It also paved ways for terrorist funding, money laundering, and various anti-national activities. Providing an ownership certificate is not possible in the case of these shares, and therefore, the identity of the owner cannot be justified at all. Even certain banks are against companies that use bearer shares as they feel the risk of getting exposed to vulnerable attacks.
This article has been a guide to what is a bearer share, and it’s meaning. Here we discuss risk involved in bearer share along with its uses, issues, advantages & disadvantages. You can learn more about accounting from the following articles –