Share Capital means the amount that a company receives towards Share Capital from the issue of shares, both Equity and Preference Share. The company divides its capital into units of smaller denominations (such as ₹ 1, ₹ 2, ₹ 5, ₹ 10 or ₹ 100). We call each such unit a Share.
Types of Shares
Section 43 of the Companies Act, 2013 prescribes that Share Capital of a company broadly can be of two types
- Preference Shares
- Equity Shares
- Preference Shares [ Section 43(b) of the Companies Act, 2013]
Those shares which carry preferential rights are Preference Shares. Following are the preferential rights of preference shares
- Preferential right to receive the dividend, this means that companies will firstly make payment to the person holding preference shares at a fixed rate or their amount is fixed. They receive dividend before Equity Shareholders.
- Return on capital on the winding up of the company before that of equity shares.
Classes of Preference Shares with reference to:
- Participation in Surplus Profits
Let us know these classes in detail
Classes of Preference Shares with reference to Dividend
With reference to Dividend preference shares are of two types:
1. Cumulative Preference Shares
Cumulative Preference Shares are those Preference Shares which carry right to receive arrears of dividend before the company makes payment to Equity Shareholders.
2. Non- Cumulative Preference Shares
Non-Cumulative Preference Shares do not carry any rights for receiving arrears of the dividend.
Classes of Preference Shares With reference to Participation in Surplus Profits
With reference to Participation in Surplus Profits Preference Shares are of two types:
1. Participating Preference Shares
The Articles of Association of a company may provide that after the company pays the dividend to the Equity Shareholders, the holders of Preference Shares will also have a right to participate in the remaining profits.
The Preference Shares who carries this right are called Participating Preference Shares.
2. Non-Participating Preference Shares
Preference Shares which do not carry the right to participate in the profits remaining after Equity Shareholders are paid are called Non-Participating Preference Shares.
Classes of Preference Shares With reference to Convertibility
With reference to Convertibility Preference Shares are of two types:
1. Convertible Preference Shares
Those Preference Shares which have the right to be converted into Equity Shares are called Convertible Preference Shares.
2. Non-Convertible Preference Shares
Non-Convertible Preference Shares do not have the right to be converted into Equity Shares.
Classes of Preference Shares With reference to Redemption
With reference to Redemption Preference Shares are of two types:
1. Redeemable Preference Shares
Redeemable Preference Shares are those Preference Shares which are redeemed by the company at a specific time (not exceeding 20 years from the date of issue) for the repayment or earlier. We call this repayment of the amount as Redemption.
2. Irredeemable Preference Shares
The amount returned by the company at the time of wind up to the holders of such shares is called Irredeemable Preference Shares.
Equity Shares are those shares which are other than Preference Shares. These are the most common class of shares that issues and carries maximum ‘risks and rewards’ of the business.
If a company incur a loss than risk is of losing part or all the shares and rewards being payment of higher dividends and appreciation in the market value.
Solved Example for you
Q. Differentiate between Preference Shares and Equity Shares.
|Basis||Preference Shares||Equity Shares|
|Right to Dividend||The company pays preference shares’ dividend before equity shares.||They receive dividend after preference shares.|
|Rate of Dividend||Maybe fix the rate of dividend||Board of Directors proposes a rate of dividend every year.|
|Arrears of Dividend||If Preference Shares are Cumulative Preference Shares, the company pays its arrear of dividend before Equity Shares.||The company declares dividend every year. In case, it does not declare them during the year, it pays it in the coming years.|
|Convertibility||If terms of issue provide, then only the company can convert Preference Shares into Equity Shares.||Equity Shares are not convertible.|
|Redemption||Preference Shares redeems on the due date.||The company may buy-back its Equity Shares.|
|Voting Rights||Only in special circumstances Preference Shares have voting rights.||Equity Shareholders have voting rights in all the circumstances.|
|Refund of Capital||Refund of capital on the winding up of the company before that of Equity Shares.||The company pays Equity Share capital only on winding up.|
|Right to Participate in Management||Preference Shareholders do not have the right to participate in the management of the company.||Equity Shareholders have the right to participate in the management of the company.|