SHARES

CLASSIFICATION OF SHARES

According to Companies Act, 2013, shares are classified into two types
1. Preference Shares
2. Equity Shares

PREFERENCE SHARES

Preference Share Capital is the sum total of the preference shares. These shares carry the
following preferential rights over equity shares-

1. As regards dividend, to be paid a fixed amount or an amount calculated at a fixed

rate
2. On winding up of the company, to return of capital paid up

Note: - Since preference shares carry a preference over equity shares, a company
cannot have only preference share capital. However, a company can have only
equity share capital. It is not compulsory to have preference share capital.

Types of preference shares

1. Cumulative Preference Shares

If dividend is skipped for a year, the dividend for that year is accumulated and in second
year dividend for both the years is to be paid

2. Participating preference shares-

These shares have a right to a share in the surplus profits of the company besides fixed
dividends.

3. Convertible Preference Shares

Convertible preference shares are shares which may be converted into equity shares.

EQUITY SHARES

Equity shares have been defined as any shares other than preference shares.

A company can issue equity shares with differential voting rights (DVR) upto 25%
of total voting power
Normally 1 equity share carries 1 vote but in case of equity shares with DVRs the
shareholders may be given 1 vote for 10 shares or 10 votes for 1 share

DIFFERENCE BETWEEN EQUITY SHARE CAPITAL AND PREFERENCE

SHARE CAPITAL

EQUITY SHARES PREFERENCE SHARES

Meaning Equity shares are those shares Preference shares are those shares
which bear risks, enjoy rewards and which enjoy preference regarding
provide permanent finance to the dividend and repayment over
company. equity shares.
Types All equity shares are of one type The various types of preference
i.e. irredeemable shares are- redeemable,
participating and convertible.
Dividend They normally get higher dividend They get a regular fixed dividend
but after making payment to and their claim stands before
preference shareholders. equity shareholders.
Rate of The rate of dividend is not fixed The rate of dividend is fixed at the
dividend but changes as per the net profits of time of issue and no changes are
the company. made in due course.
Voting Equity shareholders enjoy normal Preference shareholders do not
rights voting rights enjoy normal voting rights, except
in case of matters which affect
their interests.
Repayment Equity share capital is not Preference share capital is
repayable during the lifetime of the repayable during the lifetime of the
company. company.
Nature of Those investors who are prepared Cautious investors prefer to buy
investors to take risks buy equity shares preference shares.
Capital Capital appreciation is possible due No capital appreciation is possible.
Appreciation to prospects of rising dividends.

FURTHER ISSUE OF CAPITAL

A limited company having a share capital may if so authorized by its articles increase its
share capital by issuing new shares.

When it is proposed to increase the subscribed capital of the company by allotment of

further shares then such further shares shall be offered to the existing equity shareholders.
This right is called Right of preemption.

The shareholders also have a right to renounce the right of preemption in favour of any
other person. This is called Right of renunciation.
Exception- This Section is not applicable to

a. Exercise of option attached to debentures issued or loans raised to convert

debentures or loans into shares.
b. Conversion by Govt. of debentures or loans into shares whether there is an option
to convert the same or not. (Back door nationalization)
The power is to be exercised only if such conversion appears to be necessary in
public interest.