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Shares mean a part in the ownership of the company. Issuing shares to the investors and the
general public is a method to raise capital for the company and provide the shareholders
with a small wedge of ownership in the business. There are various types of share a
company can choose to issue to its potential investors. However, there are 4 most preferred
kinds of shares issued by companies in India.

Under the Companies Act, 2013, a share certificate needs to be issued by a business every
year post its incorporation, stating the names of persons who are owners of the company’s
shares. Every company needs to adhere to the Annual Compliance of issuance of share
certificate within 2 months after its incorporation.

In case the company defaults in adhering to the compliance relating to the issuance of share
certificates, it would be punishable with a minimum fine of Rs. 25,000 that could extend up
to Rs. 5 lakhs. Every defaulting officer of the company would also face a fine of Rs. 10,000
which could extend up to Rs. 1 lakh.

Types of Shares

Equity Shares: Also known as the ordinary shares, equity shares are the most common type
of share. Equity shares are equal in value and also impart voting and other rights, dividend
and other such rights to the shareholders. Equity shares are traded on the stock exchange
are issued are different face values.

Preference Shares: As the name suggests, preference shares are preferential in nature. In the
events of liquidation of the company, the preferential shareholders are paid out first after
settling the debts of the creditors of the company. However, preference shareholders do not
get a voting right. There are different types of preference shares including:

 Cumulative Preference Shares: A cumulative preference shareholder has a right to

claim fixed dividend of the current year out of the future profits. The dividend
accumulates unless it is paid to the shareholder. The accumulated arrears of
dividend are to be paid before anything is paid out of the profits to the holders of
any other class of shares.
 Non-cumulative Preference Shares: Non-cumulative preference shares are those
shares wherein the dividend is paid only out of the profits earned by the company
in the financial year and cannot accumulate to be paid out of profits in future. The
shareholder cannot claim any dividend if the company has not earned any profits
in that financial year.
 Participating Preference Shares: In case of participating shares, the shareholders
can claim a fixed rate of dividend as well as participate with the equity
shareholders in surplus profits remaining after the dividend is paid to equity
shareholders.
 Non-participating Preference Shares: The shareholder can only claim a fixed rate
of dividend and cannot participate in the surplus profits of the company.
 Convertible Preference Shares: The shareholders get a right to convert their
preference shares into equity shares within a certain period of time.
 Non-convertible Preference Shares: These preference shares cannot be converted
into equity shares at a later stage.
  Redeemable Preference Shares: Redeemable preference shares can be redeemed
after a certain period or after giving a certain notice at any time at the will of the
company out of the profits of the company or sale proceeds of the new shares.
 Irredeemable Preference Shares: Irredeemable preference shares are permanent in
nature and cannot be redeemed during the lifetime of the company.
Equity Shares with Differential Voting Rights

Equity shares with differential voting rights are ordinary shares but they may have more or
fewer voting rights with them. Such shares are issued to modify the quantum of control a
shareholder of these shares gets. Sometimes, equity shares with differential voting rights are
issued to founders and chief officers of the company to give them more control over the
business activities. In other cases, these shares may be issued with fewer voting rights to
reduce the control of shareholders over the day-to-day activities of the business.

Rule 4 of Companies (Share Capital & Debentures) Rules 2014 lays down that a company
cannot issue shares with differential voting rights unless the following conditions are met:

A provision must be included in the Articles of Association of Company regarding the issue
of shares with differential voting rights.

Such shares can only be issued by passing an ordinary resolution in general meeting of the
shareholders.

Sweat Equity

Sweat equity is issued to employees at a discounted rate or some consideration other than
cash. Such shares are allotted for the employee’s contribution or value addition to the
company. However, sweat equity can only be issued to employees who have completed at
least 1 year of service with the company. Also, a valuation of the company is to be
compulsorily conducted before allotment of sweat equity.
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Companies Act 2013

Types of Shares
A share or the proportion of interest of a shareholder is equal to the
proportion of the amount paid to the total capital payable to the
company. Let us look at the various types of shares a company can issue
– equity shares and preferential shares.

Shares
A share in the share capital of the company, including stock, is the
definition of the term ‘Share’. This is in accordance with Section 2(84)
of the Companies Act, 2013. In other words, a share is a measure of the
interest in the company’s assets held by a shareholder. In this article, we
will look at the different types of shares like preferential and equity
shares. Further, we will understand certain definitions and regulations
surrounding them.

The Memorandum and Articles of Association of the company

prescribe the rights and obligations of shareholders. Further, a
shareholder must have certain contractual and other rights as per the
provisions of the Companies Act, 2013.

Section 44 of the Companies Act, 2013, states that shares or debentures

or other interests of any member in a company are movable properties.
Also, they are transferable in the manner prescribed in the Articles of
the company. Further, Section 45 of the Act mandates the numbering of
every share. This number is distinctive. However, if a person is a holder
of the beneficial interest in the share, then this rule does not apply
(example: share in the records of a depository).

Kinds of Share Capital

 (Source: WealthVidya)

According to Section 43 of the Companies Act, 2013, the share capital

of a company is of two types:

1. Preferential Share Capital

2. Equity Share Capital
Preferential Share Capital

The preferential share capital is that part of the Issued share capital of
the company carrying a preferential right for:

 Dividend Payment – A fixed amount or amount calculated at a fixed

rate. This might/might not be subject to income tax.
 Repayment – In case of a winding up or repayment of the amount of
paid-up share capital, there is a preferential right to the payment of
any fixed premium or premium on any fixed scale. The Memorandum
or Articles of the company specifies the same.
Equity Share Capital – Equity Shares

All share capital which is NOT preferential share capital is Equity Share
Capital. Equity shares are of two types:
1. With voting rights
2. With differential rights to voting, dividends, etc., in accordance with
the rules.
In 2008, Tata Motors introduced equity shares with differential voting
rights – the ‘A’ equity shares. According to the issue,

 Every 10 ‘A’ equity shares have one voting right

 ‘A’ equity shares get 5 percentage points more dividend than the
ordinary shares.
Due to the difference in voting rights, the ‘A’ equity shares traded at a
discount to ordinary shares with complete voting rights.

Deeming of Capital as Preferential Capital

In certain cases, capital is deemed as preferential capital even though it

is entitled to either or both of the following rights:

1. For dividends, apart from the preferential rights to amounts specified

above, it can participate (fully or to a certain extent) with capital not
entitled to the preferential rights.
2. In case of a winding up, apart from the preferential right of the capital
amounts specified above, it can participate (fully or to a certain
extent), with capital not entitled to preferential rights in any surplus
remaining after repaying the entire capital.
Remember, Section 43 is not applicable to private companies if the
Memorandum or Articles of Associates specifies it.

Solved Question on Equity Shares and Preference

Shares
Q: An equity share owner enjoys the same privileges as a preferential
share owner. True or False?

Ans: This statement is false. A preferential shareowner has a few

privileges over the equity share owner.

 He gets paid his dividend before that equity shareowners

 During liquidation, the company will pay a preferential shareowner
first, ahead of the equity shareowner.
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Certain business organizations need to raise money from public. In India, such an
organization needs to be registered under the Indian Companies Act. Such an
organization is called a public limited company.

A company may need money to start business or to start a new project. The sum of
money required is called capital. The required capital is divided into small equal parts,
and each part is called share. The company prepares a detailed plan of the proposed
project and frames rules and regulations regarding its functioning. They, then, draft a
proposal, issue a prospectus, explaining the plan of the project and invite the public to
invest money in their project. They, thus, pool up the required funds from the public, by
assigning them shares of the company. The value of a share may be Re 1, Rs 10, Rs
100, Rs 1000, etc. The capital is raised by selling these shares. A person who
purchases shares of the company becomes a shareholder of the company.

Value of shares
The original value of a share printed in the certificate of the share is called its face
value or nominal value (in short, NV). The NV of a share is also known as register
value, printed value and par value. The price at which the share is sold or purchased in
the capital market through stock exchanges is called its market value (in short, MV).

A share is said to be:

 At premium or Above par, if its market value is more than its face value.
 At par, if its market value equals its face value.
 At discount or Below par, if its market value is less than its face value.

The share of a company that is doing well or expected to do well is sold in the market at
a price higher than its NV. In such a situation, we say the share is at premium or above
par. For example, if a share of NV of Rs 10 is selling at Rs 16 then the share is at a
premium of Rs 6. The share of a company that is neither doing well nor poorly is sold in
the market at a price equal to its NV. For example, if a share of NV of Rs 100 is selling
at Rs 100 then the share is at par. The share of a company that is doing poorly or may
do poorly in the future is sold in the market at a price lower than its NV. In such a case,
we say the share is at a discount or below par. For example, if a share of NV of Rs 100
is selling at Rs 80 then the share is at a discount of Rs 20.

Dividend, Rate of Dividend

The part of the annual profit of a company distributed among its shareholders is called
dividend. The dividend is always reckoned on the face value of a share irrespective of
its MV.
The rate of dividend is expressed as a percentage of the NV of a share per annum.
BIBLIOGRAPHY

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