A share or the proportion of interest of a shareholder is equal to the proportion of the amount paid to the total capital payable to the company. Let us look at the various types of shares a company can issue – equity shares and preferential shares.
A share in the share capital of the company, including stock, is the definition of the term ‘Share’. This is in accordance with Section 2(84) of the Companies Act, 2013. In other words, a share is a measure of the interest in the company’s assets held by a shareholder. In this article, we will look at the different types of shares like preferential and equity shares. Further, we will understand certain definitions and regulations surrounding them.
The Memorandum and Articles of Association of the company prescribe the rights and obligations of shareholders. Further, a shareholder must have certain contractual and other rights as per the provisions of the Companies Act, 2013.
Section 44 of the Companies Act, 2013, states that shares or debentures or other interests of any member in a company are movable properties. Also, they are transferable in the manner prescribed in the Articles of the company. Further, Section 45 of the Act mandates the numbering of every share. This number is distinctive. However, if a person is a holder of the beneficial interest in the share, then this rule does not apply (example: share in the records of a depository).
According to Section 43 of the Companies Act, 2013, the share capital of a company is of two types:
- Preferential Share Capital
- Equity Share Capital
The preferential share capital is that part of the Issued share capital of the company carrying a preferential right for:
- Dividend Payment – A fixed amount or amount calculated at a fixed rate. This might/might not be subject to income tax.
- Repayment – In case of a winding up or repayment of the amount of paid-up share capital, there is a preferential right to the payment of any fixed premium or premium on any fixed scale. The Memorandum or Articles of the company specifies the same.
All share capital which is NOT preferential share capital is Equity Share Capital. Equity shares are of two types:
- With voting rights
- With differential rights to voting, dividends, etc., in accordance with the rules.
In 2008, Tata Motors introduced equity shares with differential voting rights – the ‘A’ equity shares. According to the issue,
- Every 10 ‘A’ equity shares have one voting right
- ‘A’ equity shares get 5 percentage points more dividend than the ordinary shares.
Due to the difference in voting rights, the ‘A’ equity shares traded at a discount to ordinary shares with complete voting rights.
Deeming of Capital as Preferential Capital
In certain cases, capital is deemed as preferential capital even though it is entitled to either or both of the following rights:
- For dividends, apart from the preferential rights to amounts specified above, it can participate (fully or to a certain extent) with capital not entitled to the preferential rights.
- In case of a winding up, apart from the preferential right of the capital amounts specified above, it can participate (fully or to a certain extent), with capital not entitled to preferential rights in any surplus remaining after repaying the entire capital.
Remember, Section 43 is not applicable to private companies if the Memorandum or Articles of Associates specifies it.
Q: An equity share owner enjoys the same privileges as a preferential share owner. True or False?
Ans: This statement is false. A preferential shareowner has a few privileges over the equity share owner.
- He gets paid his dividend before that equity shareowners
- During liquidation, the company will pay a preferential shareowner first, ahead of the equity shareowner.