PREFERENCE AND EQUITY SHARE CAPITAL

The share capital of a public company may consist only of two kinds of shares- preference shares and equity shares. Equity Share capital may be with similar rights or with different rights as to dividend, voting or otherwise in accordance with the companies (issue of share capital with difference voting right) Rules 2001.

A preference share has a preference in regards to payment of fixed amount of dividend or fixed rate of dividend and preferential right of repayment of capital in the event of winding of company. With regard to payment of dividend, preference share may be cumulative or noncumulative. Equity shareholders are entitled to the residue of the divisible profits. if any, after entitled to the residue of the divisible profits, if any , after the preference shareholders have received their fixed rate of dividend (section 85). ³(1) "Preference share capital" means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely:²

(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax; and (b) that as respects capital, it carries or will carry, on a winding up or repayment of capital, a preferential rights to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential rights to the payment of either or both of the following amounts, namely:² (i) any money remaining unpaid, in respect of the amounts specified in clause (a), upto the date of the winding up or repayment of capital; and

(ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. Explanation.² Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:²

1995. as respects capital. the article of the company authorize such an issue. whether fully or to a limited extent. which include inter alia: i) ii) iii) iv) v) vi) it has distributed profits in the 3 financial years proceeding the year in which it is decided to issue such share. Rules. shareholders approved at a general meeting has been obtained and through Postal Ballot in case of listed company. to include particulars of differential rights to which holder is entitled. (3) The expressions "preference share" and "equity share" shall be construed accordingly. 1992. in addition to the preferential right to the amount specified in clause (a). it has a right to participate. by substituting the section 86 of the Act. of the amounts specified in clause (b). Also such company is required to maintain a register as under Section 150 of the Act. The Company (Amendment )Act. it has a right to participate. voting or otherwise in accordance with the Companies (issue of share Capital with Differential Voting rights) Rule 2001. all share capital which is not preference share capital. (ii) that. voting or otherwise if it satisfies the condition laid down in Rule 3. FEMA. 1999. SCRA. it has not failed to repay its deposit or interest or redeem debentures on due dates or to pay dividend or to meet investors grievances. on a winding up. with capital not entitled to the preferential right aforesaid. with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid. 2000 has. with reference to any such company. empowered companies to issue equity share capital with differential rights as to dividend. it has not defaulted in the filling of annual account and annual returns in those 3 preceding financial year. in addition to the preferential right to the repayment. . (2) "Equity share capital" means. it has not been convicted for an offence under SEBI Act. whether fully or to a limited extent. as respects dividends. Pursuant to these. a company limited by share may issue share with differential rights as to dividend.(i) that.

under the Indian Companies Act. If a company is unable to redeem any preference shares within the specified period. In the case of cumulative preference shares. it may. Preference shares are presumed to be cumulative unless expressly described as non-cumulative. Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company. the arrears of dividend cannot be claimed in the subsequent years. REDEEMABLE AND NON. on the preference shares the deficiency must be made up out of the profits of subsequent years. to participate in the balance of profits with the equity shareholders after they get a fixed rate of dividend on their shares. if the profits of the company in any years are not sufficient to pay the fixed dividend.REDEEMABLE Redeemable Preference shares are preference shares which have to be repaid by the company after the term of which for which the preference shares have been issued. A company can issue the preference shares which from the very beginning are . Non-participating preference shares are entitled only to a fixed rate of dividend and do not share in the surplus profits.TYPE OF PREFERENCE SHARE PARTICIPATING AND NON-PARTICIPATING Participating preference shares are those shares which are entitled. a company cannot issue irredeemable preference shares. the dividend is only payable out of the net profits of each year. CUMULATIVE AND NON-CUMULATIVE PREFERENCE SHARES: With regard to the payment of dividend. a company limited by shares cannot issue preference shares which are redeemable after more than 10 years from the date of issue. If there are no profits in any year. The accumulated arrears of dividend must be paid before anything is paid out of the profits to the holders of any other class of shares. unless expressly provided in the memorandum or the articles or the terms of issue. Such a right must be expressly provided in the memorandum or the articles of association of the company. However. In the case of non-cumulative preference shares. with consent of the Company Law Board. In other words the maximum tenure of preference shares is 10 years. In fact. The preference shares are presumed to be non-participating. in addition to preference dividend at a fixed rate. A mere fact that the articles of a company confer on the preference shareholders a right to participate with the equity shareholders in the surplus profits does not necessarily mean that the preference shareholders are entitled to participate in the surplus assets also. Any ambiguous language in the articles will not be enough to make them noncumulative. issue further redeemable preference shares equal to redeem the old preference shares including dividend thereon. The participating preference shares may also have the right to share in the surplus assets of the company on its winding up. preference shares may be cumulative or noncumulative.

gives the preference shareholders cumulative dividend. 2. they cannot be postponed. 4. Rights of preference shareholders. See also Staples v Eastman Co.redeemable on a fixed date or after certain period of time not exceeding 10 years provided it comprises of following conditions :-Section 80 1. on the 1 2 James v Buena Ventura Syndicate (1896) Ch 456. 3. The shares may be redeemed out of profits of the company which otherwise would be available for dividends or out of proceeds of new issue of shares made for the purpose of redeem shares. It must be authorised by the articles of association to make such an issue.4 Where preference shareholders are given a fixed preferential dividend at a specified rate. it was held that the company could pay dividend on ordinary share capital subject only to the fixed cumulative dividend of 7 p. (1912) 2 Ch 571: (1914) AC 11 . Where a clause in the memorandum of association provided that the preference shares should entitle the holders to a fixed cumulative dividend at 7 p. The shares will be only redeemable if they are fully paid up.1 but if the preference shares are issued subject to the rights of the company to issue fresh capital having such preference and priorities as shall be agreed upon the original preference shares may be postponed.2 A declaration that the profits are to be applied first in paying a dividend on the preference share and secondly on the ordinary shares. Welton v Saffery (1897) AC 299 Underwood v London Music Hall (1901) 2 Ch 309 3 Foster v Coles (1906) 22 TLR 555 4 Adair v Old Bushmills Distillery (1908) WN 24.5 Notes to sections 80 and 475. When shares are redeemed out of profits a sum equal to nominal amount of shares redeemed is to be transferred out of profits to the capital redemption reserve account.c. If there is premium payable on redemption it must have provided out of profits or out of shares premium account before the shares are redeemed. (1896) 2 Ch 303 5 Will v United Lankat Plantations Co. on the amount for the time paid-up and to the repayment of capital before any dividend was paid to the holders of ordinary share and to a further dividend calculated as therein mentioned. 5. 3 unless it is provided that the profits of each year are to be distributed among the preference shareholders on the basis mentioned. If it is provided in the memorandum or the articles of association that the rights of the holders of preference shares should come first. their right to any further dividend is impliedly negative. This reserve can be used to issue of fully paid bonus shares to the members of the company.c. This amount should then be utilised for the purpose of redemption of redeemable preference shares.

(1944) 1 Ch 323. it was held that after payment of the preference capital. and the directors may from time to time fix the minimum amount of stock transferable but so that such minimum shall not exceed the nominal amount of the shares from which the stock arose.7 A guarantor of preference dividends who has made payments pursuant to the guarantee can claim only to be subrogated to the rights of preference shareholders and cannot claim to be repaid as a creditor by the company. or any part thereof.8 CONVERSION OF SHARES INTO STOCK The company may by ordinary resolution convert any paid up shares into stock. in priority to the ordinary shares and the company went into voluntary liquidation. and the words "share" and " shareholder" the rein shall include "stock" and "stockholder". have the same rights. the preference shares were not entitled to any further priority over the ordinary shares for payment of arrears of dividend.preference shares and that the latter were entitled in the event of a winding-up to rank pari passuwith the holders of ordinary shares in any surplus assets of the company. The holders of stock may transfer the same. (1909) 2 Ch 187 and Fraser & Chalmers Ltd. or as near thereto as circumstances permit. but no such privilege or advantage (except participation in the dividends and profits of the company and in the assets on winding up )shall be conferred by any amount of stock which would not. (1919) 2 Ch 114 in preference to National Telephone Co. and re-convert any stock into paid up shares of any denomination. in the same manner and subject to the same regulations. privileges and advantages as regards dividends. voting at meetings of the company and other matters as if they held the shares from which the stock arose. The holders of stock shall according to the amount of stock held by them. as and subject to which the shares from which the stock arose might previously to conversion have been transferred. Such of the regulations of the company as are applicable to paid up shares shall apply to stock.6 Where the memorandum of association conferred on the preference shareholders a right to a fixed cumulative dividend of 6 per cent per annum on the capital paid on them and they were to rank. both as regards dividend and capital. (1914) 1 Ch 755. if existing in shares. have conferred that privilege or advantage. 7 Wood Skinner & Co. 8 Walters' Deed of Guarantee (1933) Ch 227 . 6 Anglo-French Music Hall v Nicoll (1921) 1 Ch 386 following Espuela Land & Cattle Co.

See sections 84 and 95 and Notes thereto. as if they held the shares from which the stock arose. (a) convert any paid-up shares into stock. This regulation corresponds to regulation 36 Table A Schedule 1 What is stock.10Stock not fully paid-up is wholly unlawful and confers no right on the holders. according to the amount of stock held by them have the same rights. the shares from which the stock arose might before the conversion have been transferred. (1912) 1 Ch 72 11 Ibid 12 Alison's case (1873) 15 Eq 395: 9 Ch App 10 . and (b) reconvert any stock into paid-up shares of any denomination. but no such privilege or advantage (except participation in the dividends and profits of the company and in the assets on windingup) shall be conferred by an amount of stock which would not. by ordinary resolution. This regulation corresponds to regulation 38 Table A Schedule I Such of the regulations of the company (other than those relating to share warrants). if existing in shares. have conferred that privilege or advantage. or as near thereto as circumstances admit: Provided that the Board may. and other matters. so however that such minimum shall not exceed the nominal amount of the shares from which the stock arose.12 .9 It is expressed in money instead of as so many shares. dividends voting at meetings of the company.²Stock is simply a set of shares put together in a bundle. This regulation corresponds to regulation 37 Table A Schedule I The holders of stock shall. A company cannot make an original issue of stock.The company may. The holders of stock may transfer the same or any part thereof in the same manner as. as are applicable to paid-up shares shall apply to stock and the words "share" and "shareholder" in those regulations shall include "stock" and "stockholder" respectively. fix the minimum amount of stock transferable. from time to time. This regulation corresponds to regulation 39 Table A Schedule I 9 Morrice v Aylmer (1875) 7 HL 717 Home Foreign Investment Co.11They may be entitled as creditors for the amount they have paid. privileges and advantages as regards. and subject to the same regulations under which.