Types of Shares

Shares represent the ownership interest of members in a company. They form the foundation of a company’s capital structure and determine the rights, obligations and financial participation of shareholders. The Companies Act, 2013 provides a clear legal framework governing the classification and regulation of shares.

Broadly, shares are divided into two main categories: equity shares and preference shares. Each category carries distinct rights relating to dividend, voting and repayment of capital. Understanding the different types of shares is essential for analysing corporate ownership, control and financial distribution.

Kinds of Shares under the Companies Act, 2013

Section 43 of the Companies Act, 2013 provides that the share capital of a company limited by shares shall be of two kinds only:

• Equity share capital
• Preference share capital

Equity shares may carry voting rights or differential rights as to dividend, voting or otherwise, subject to prescribed conditions. Preference shares, on the other hand, carry preferential rights in specific matters such as dividend and repayment of capital.

Equity Shares

Equity shares, also known as ordinary shares, represent the residual ownership in a company. These shares do not carry any preferential rights in respect of dividend or repayment of capital.

Key Features of Equity Shares

• Equity shareholders are the real owners of the company and bear the highest level of risk. Their returns depend entirely on the profitability of the company.
• The dividend on equity shares is not fixed. It varies depending on the profits available and the decision of the company’s management and shareholders.
• Equity shareholders have voting rights on all resolutions placed before the company. Their voting power is proportionate to their share in the paid-up equity share capital.
• In the event of winding up, equity shareholders are paid only after all liabilities and preference shareholders have been satisfied.
• The liability of equity shareholders is limited to the amount unpaid on their shares.

Types of Equity Shares

Although equity shares are broadly one category, they may be classified into different types based on rights, issuance and purpose.

Equity Shares with Voting Rights

These are standard equity shares carrying full voting rights. Every shareholder holding such shares can vote on all matters affecting the company, including appointment of directors, approval of accounts and major corporate decisions.

Equity Shares with Differential Rights

The Companies Act, 2013 permits the issue of equity shares with differential rights as to dividend, voting or otherwise. These shares may provide higher dividend but lower voting rights or vice versa, depending on the terms of issue.

Rights Shares

Rights shares are issued to existing shareholders in proportion to their existing shareholding. This mechanism ensures that current shareholders have an opportunity to maintain their ownership percentage when the company raises additional capital.

Bonus Shares

Bonus shares are issued free of cost to existing shareholders out of accumulated profits or reserves. Instead of distributing profits as cash dividends, the company capitalises its reserves and issues additional shares.

Sweat Equity Shares

Sweat equity shares are issued to employees or directors in recognition of their contribution, such as providing know-how, intellectual property or value addition. These shares act as a reward and incentive for key contributors.

Preference Shares

Preference shares represent a class of shares that carry certain preferential rights over equity shares. These preferences relate primarily to dividend and repayment of capital.

Meaning and Nature of Preference Shares

Preference share capital refers to that part of the share capital which satisfies the following conditions:

• It carries a preferential right to receive dividend at a fixed amount or fixed rate before any dividend is paid to equity shareholders.
• It carries a preferential right to repayment of capital in the event of winding up of the company.

Thus, preference shareholders enjoy priority over equity shareholders but usually have limited control over company management.

Types of Preference Shares

Preference shares can be classified into different types based on their features and rights.

Participating and Non-Participating Preference Shares

Participating preference shares carry a right to receive fixed dividend and also participate in surplus profits after a specified dividend has been paid to equity shareholders. In addition, they may also participate in surplus assets on winding up.

Non-participating preference shares are entitled only to the fixed preferential dividend and repayment of capital. They do not share in additional profits or surplus assets unless expressly provided.

Cumulative and Non-Cumulative Preference Shares

Cumulative preference shares allow the accumulation of unpaid dividends. If dividend is not declared in a particular year, it is carried forward and paid in future years when profits are available.

Non-cumulative preference shares do not carry such a right. If no dividend is declared in a particular year, the shareholders lose the right to claim it in future years.

Preference shares are generally presumed to be cumulative unless expressly stated otherwise.

Redeemable Preference Shares

Under Section 55 of the Companies Act, 2013, companies are permitted to issue only redeemable preference shares. These shares are repayable after a specified period, which shall not exceed twenty years from the date of issue.

An exception exists for infrastructure projects, where preference shares may be issued for a period exceeding twenty years but not exceeding thirty years, subject to prescribed conditions.

Irredeemable Preference Shares

Irredeemable preference shares, which are not repayable during the lifetime of the company, are not permitted under the Companies Act, 2013. This ensures that companies do not create perpetual financial obligations.

Convertible and Non-Convertible Preference Shares

Convertible preference shares provide an option to convert such shares into equity shares after fulfilling specified conditions. This feature allows investors to participate in ownership growth.

Non-convertible preference shares do not carry such conversion rights and remain preference shares throughout their tenure.

Voting Rights of Shareholders

The voting rights of shareholders differ based on the type of shares held.

• Equity shareholders have the right to vote on every resolution. Their voting power is proportionate to their paid-up equity share capital.
• Preference shareholders have limited voting rights. They can vote only on matters affecting their rights or on resolutions relating to winding up or reduction of capital.
• However, if dividend on preference shares remains unpaid for two years or more, preference shareholders gain voting rights on all resolutions.

Non-Voting Shares

The concept of non-voting shares is recognised through the provision for equity shares with differential rights. Such shares may carry no voting rights or limited voting rights but may offer higher dividend in return. This enables companies to raise capital without diluting control.

Par Value of Shares

The par value or nominal value of shares represents the face value assigned to each share. Regulatory provisions allow companies to issue shares with any par value, subject to it not being less than one rupee.

Companies may alter the par value of shares if their shares are dematerialised or if they have applied for dematerialisation. However, at any given time, a company can have only one denomination of shares.

Preference Shares Compared with Equity Shares

The distinction between equity shares and preference shares is fundamental to corporate finance.

• Preference shares carry fixed dividend, whereas equity shares have variable dividend depending on profits.
• Preference shareholders receive dividend before equity shareholders.
• Preference shareholders have priority in repayment of capital during winding up.
• Equity shareholders have full voting rights, while preference shareholders have restricted voting rights.
• Preference shares can be redeemed, whereas equity shares are not redeemable.
• Equity shareholders benefit from surplus profits, while preference shareholders generally do not, unless participating rights are provided.

Conclusion

The classification of shares into equity and preference shares forms the backbone of a company’s capital structure. Each type of share reflects a balance between risk, return and control. Equity shares represent ownership and control with variable returns, while preference shares offer stability through fixed returns and priority in repayment.

The Companies Act, 2013 ensures a structured and regulated approach to issuing and managing different types of shares. By defining rights, restrictions and procedures, it safeguards both companies and investors, while facilitating efficient capital formation.