Preference Shares

Preference shares are the shares where shareholders get a

preferential dividend. The dividend may consist of a fixed amount
that is payable to preference shareholders. As the name
suggests, the preference shareholders get a ‘preference’ over the
equity shareholders in receiving dividends. At times, the equity
shareholders may not even receive profits. The dividend amount
paid to them may be calculated at a fixed rate. The preference
shareholders vote only on such resolutions that directly affect
their rights as preference shares and a resolution for the winding-
up of the company or for the repayment or reduction of its equity
or preference share capital.

Nonetheless, where the preference dividend is not paid for two

years or more, the preference shareholders get voting right on
every resolution placed before the company. Voting rights of a
preference shareholder, on a poll, shall be in proportion to his
share in the paid-up preference share capital of the company.

Furthermore, during the winding-up of the company the

preference shareholders get a right to be paid, i.e., amount paid
up on preference shares must be paid back before anything is
paid to the equity shareholders. Preference shares can be
bifurcated into six kinds, namely, cumulative preference shares,
non – cumulative preference shares, participating preference
shares, non – participating preference shares, redeemable
preference shares and non – redeemable preference shares.

Cumulative Preference Shares And Non-Cumulative

Preference Shares

There may be times when the company does not generate profits
and therefore fails to give dividends. Preference shareholders who
own cumulative preference shares can be paid from the profits
made in the subsequent years for the current year’s dividends
that are in arrears. Until it is fully paid, the fixed dividend keeps
on accumulating. The non-cumulative preference share gives the
right to its holder to a fixed amount or a fixed percentage of
dividend out of the profits of each year. If no profits are available
in any year or no dividend is declared, the preference
shareholders get nothing, nor can they claim unpaid dividends in
the coming year. Preference shares are cumulative unless
expressly stated to be non-cumulative and the same was held
in Foster v. Coles[iii] where it was observed that mere deletion of
the word cumulative would not render the preference shares non
– cumulative.

Participating Preference Shares And Non-participating

Preference Shares

The shares which are entitled to a fixed preferential dividend are

known as Participating preference shares. Additionally, they have
a right to participate in the surplus profits along with equity
shareholders after dividend at a certain rate has been paid to
equity shareholders. For example, after 20% dividend has been
paid to equity shareholders, the preference shareholders may
share the surplus profits equally with equity shareholders. Again,
in the event of winding-up, if after paying back both the
preference and equity shareholders, there is still some surplus
left, then the participating preference shareholders get additional
share in the surplus assets of the company. Unless expressly
provided, preference shareholders get only the fixed preferential
dividend and return of capital in the event of winding-up out of
realised values of assets after meeting all external liabilities and
nothing more. It is pertinent to note that Participating Preference
Shareholder’s right to participate shall be provided either in the
MOA or AOA or by virtue of their terms of issue.

Reedeemable Preference Shares And Irredeemable

Preference Shares

Although equity shares are not redeemable, as per section 55 of

the Companies Act, preference shares can either be redeemable
or irredeemable. Redeemable preference shares refer to those
shares where the shareholders can be repaid after an estimated
period of time. This act of repayment is referred to as redemption
of preference shares. Therefore, in cases where the shareholder
is issued a redeemable preference share, they are entitled to
receive that amount after the completion of the stipulated period.
Where the amount cannot be redeemed even after the completion
of the stipulated period, such shares will be referred to as
irredeemable preference shares. According to Section 55 of the
Companies Act, a company that is limited by shares cannot issue
redeemable preference shares. Nonetheless, it may only issue
redeemable preference shares if authorized by the AOA of the
said company, and are liable to be redeemed within a period that
does not go beyond 20 years from the date of their issue.
However, subject to certain conditions given in the provisions of
the Companies Act and the Rules and Regulations, a company
may issue such preference shares for infrastructure projects for a
period exceeding 20 years.

2. Equity Shares

The most common kind of shares that we hear about on a daily

basis are equity shares. Equity shares are defined as those shares
that are not preference shares, this simply means that shares
which do not enjoy any preferential right in the matter of
payment of dividend or repayment of capital, are known as equity
shares. After the rights of preference shareholders are done, the
equity shareholders get their share in the remaining amount of
distributable profits of the company. But there may be times
when the company may not accrue any profits as dividend to its
equity shareholders even when it has distributable profits. The
dividend on equity shares is not fixed and may differ every year
depending on the profits available. Equity shareholders of a
company limited by shares get a right to vote on every resolution
placed before the company and their voting rights on a poll are in
proportion to the share in the paid-up equity share capital of the
company. But if the MOA or the AOA of the company allows it
provide differential voting rights it may do so.

Sweat Equity Shares

According to section 54 of the Companies Act, a company can

issue sweat equity shares. These equity shares are issued by a
company to its own employees or directors. Such shares are
generally issued at a discount. Such shares might also be issued
for consideration other than cash like for rendering know how or
making some Intellectual Property Rights available for the
company, etc. All limitations, restrictions and other provisions
that are applicable to equity shares are also applicable to sweat
equity shares. Sweat equity shareholders rank pari passu with
regular equity shareholders.

3. Bonus Shares

Bonus shares are always issued to existing members. According

to Article 63, a company is free to issue fully paid up bonus
shares to the members out of its Securities Premium Account, its
free reserves and Capital Redemption Reserve Account.
In Standard Chartered Bank v. The Custodian[iv], the court
stated that such kind of shares can be described as a distribution
of capitalized undivided profit. Furthermore, the Court added that
when bonus shares are issued, there is an increase in the
company’s capital due to transferring the amount from the
company’s reserve to the Capital Account of the company. This
results in additional or extra shares being issued to the
shareholders. In the aforementioned case, the Supreme Court
even went on to state “A bonus share is a property which comes
into existence with an identity and value of its own and capable of
being bought and sold as such.”

Conclusion
Often people end up confusing a share of a company with its
stock or a share certificate. Therefore, while studying Company
Law, it becomes extremely essential to study certain basic
concepts like the exact meaning of shares, its various types, as
well as the structure of share capital.