Definition:

According to the section 2(46) of the Company’s Act 1956, share means a part in the share
capital of the company and it also includes stock except where a distinction between stock and
share capital is made expressed or implied.

Types of shares:
As per the provision of section 85 of the Companies Act, 1956, the share capital of a company
consists of two classes of shares, namely:

1. Preference Shares
2. Equity Shares
3. Preference Shares:

According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the
following two preferential rights:
(a) The payment of dividend at fixed rate before paying dividend to equity shareholders.
(b) The return of capital at the time of winding up of the company, before the payment to the
equity shareholder.

Both the rights must exist to make any share a preference share and should be clearly mentioned
in the Articles of Association. Preference shareholders do not have any voting rights, but in the
following conditions they can enjoy the voting rights:
(1) In case of cumulative preference shares, if dividend is outstanding for more than two years.
(2) In case of non-cumulative preference shares, if dividend is outstanding for more than three
years.
(3) On any resolution of winding up.
(4) On any resolution of capital reduction.
Types of preference shares:
In addition to the aforesaid two rights, a preference shares may carry some other rights. On the
basis of additional rights, preference shares can be classified as follows:
Cumulative Preference Shares: Cumulative preference shares are those shares on which the
amount of divided if not paid in any year, due to loss or inadequate profits, then such unpaid
divided will accumulate and will be paid in the subsequent years before any divided is paid to the
equity share holders. Preference shares are always deemed to be cumulative unless any express
provision is mentioned in the Articles.
Non-Cumulative Preference Shares: Non-cumulative preference shares are those shares on
which arrear of dividend do not accumulate. Therefore if divided is not paid on these shares in
any year, the right receive the dividend lapses and as such, the arrear of divided is not paid out of
the profits of the subsequent years.
Participating Preference Shares: Participation preference shares are those shares, which, in
addition to the basic preferential rights, also carry one or more of the following rights:
(a) To receive dividend, out of surplus profit left after paying the dividend to equity
shareholders.
(b) To have share in surplus assets, which remains after the entire capital has been paid on
winding up of the company.
Non-Participating Preference Shares: Non-participation preference shares are those shares,
which do not have the following rights:

Types of shares; Equity shares; Preference shares; Deferred shares; Bonus shares
There are different types of shares. I have mentioned about the most popular shares which are as
follows:-
Equity shares: These shares are also known as ordinary shares. They are the shares which do
not enjoy any preference regarding payment of dividend and repayment of capital. They are
given dividend at a fluctuating rate. The dividend on equity shares depends on the profits made
by a company. Higher the profits, higher will be the dividend, where as lower the profits, lower
will be the dividend.
Preference shares: These shares are those shares which are given preference as regards to
payment of dividend and repayment of capital. They do not enjoy normal voting rights.
Preference shareholders have some preference over the equity shareholders, as in the case of
winding up of the company, they are paid their capital first. They can vote only on the matters
affecting their own interest. These shares are best suited to investors who want to have security
of fixed rate of dividend and refund of capital in case of winding up of the company.

Deferred shares: These shares are those shares which are held by the founders or pioneer or
beginners of the company. They are also called as Founder shares or Management shares.
In deferred shares, the right to share profits of the company is deferred, i.e. postponed till all the
other shareholders receive their normal dividends. Being the last claimants of the profits, they
have a considerable element of speculation or uncertainty and they have to bear the greatest risk
of loss. The market price of such shares shows a very wide fluctuation on account of wide
dividend fluctuations. Deferred shares have disproportionate voting rights. These shares have a
small denomination or face value. Deferred shares are not transferable if issued by a private
company. Deferred shareholders do not enjoy the right of priority to have shares offered in case
of the issue of shares by the company. If the company goes into liquidation the deferred
shareholders can get refund of capital and participate in the surplus capital, if any, after the rights
of preference and equity shareholders have been satisfied.

Bonus shares: The word bonus means a gift given free of charge. Bonus shares are those shares
which are issued by the company free of charge as bonus to the shareholders. They are issued to
the existing shareholders in proportion to their existing share holdings. It is a kind of gift to the
shareholders from the company. It is bonus in the form of shares instead of cash. It is given out
of accumulated profits and reserves. These shares have all types of preferences which are
available to the existing shares. For example. two bonus shares for five equity shares. The issue
of bonus shares is also termed as capitalization of undistributed profits. Bonus shares is a type of
windfall gain to the equity shareholders. They are advantageous to the equity shareholders as
they get additional shares free of cost and also they earn dividend on them in future.
Conditions for issue of bonus shares:
(i) Sufficient amount of undistributed profits: There must be sufficient amount of
undistributed profits for the issue of bonus shares.
(ii) Provision in the articles: There must be a provision in the articles of association regarding
the issue of bonus shares. If there is a provision in the articles regarding the issue of bonus shares
the company can issue bonus shares if there is no provision, the company cannot issue the bonus
shares.
(iii) Suitable Resolution: The Board of Directors must pass a suitable resolution in the Board
meeting for the issue of bonus shares.
(iv) Shareholders approval: The shareholders must give formal approval for the issue of bonus
shares in the Annual General Meeting.
(v) When a company can issue: A company can issue bonus shares only twice in a period of
five years.
(vi) Fully paid up shares: Bonus shares can be issued only when the existing shares are fully
paid up.