Shares in the company may be related that is they may carry the same rights and liabilities and confer on their holders the same rights, liabilities and duties. There are two types of shares under Indian Company Law that is Equity shares and Preference Shares.
A. An equity share means that branch of the share capital of the company which are not preference shares.
B. Preference Shares means shares which accomplish the following 2 conditions, so, a share which is does not fulfill both these conditions is an equity share.
- It carries special rights in respect of Dividend at fixed amount or at fixed rate i.e. dividend payable is payable on predetermined figure or percent and this dividend must paid before the holders of the equity shares can be paid dividend.
- It also carries special right in regard to payment of capital on winding up or otherwise. It means the sum paid on preference share must be paid back to preference shareholders before anything in paid to the equity shareholders. In other words, preference share capital has priority both in repayment of dividend as well as capital.
Types of Preference Shares
A. Cumulative or Non-Cumulative
A non-cumulative or simple preference shares gives right to predetermined percentage dividend of profit of each year. In case no dividend thereon is stated in any year because of absence of profit, the holders of preference shares get zero nor can they claim unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference shares still give the right to the preference shareholders to demand the unpaid dividend in any year during the succeeding year or years when the profits are available for distribution. In this case dividends which are not paid in every year are accumulated and are paid out when the profits are available.
B. Redeemable and Non- Redeemable
Redeemable Preference shares are preference shares which have to be repaid by the company once the term of which for which the preference shares have been issued. Irredeemable Preference shares means preference shares need not repaid by the company apart from on winding up of the company. But, under the Indian Companies Act, a company cannot issue irredeemable preference shares; in fact, a company restricted by shares cannot issue preference shares which are redeemable after more than 10 years from the date of issue. In other words the highest tenure of preference shares is 10 years. If a company is incapable to redeem any preference shares within the specific period, it may, with consent of the Company Law Board, issue further redeemable preference shares equivalent to redeem the old preference shares including dividend thereon. A company can issue the preference shares which from the commencement are redeemable on a fixed date or after definite period of time not more than 10 years provided it comprises of following conditions :
- It must be certified by the articles of association to make such an issue
- The shares will be only redeemable if they are completely paid up.
- The shares may be redeemed out of profits of the company which or else would be available for dividends or out of proceeds of new issue of shares made for the purpose of redeem shares.
- If there is premium to be paid on redemption it must have provided out of profits or out of shares premium account before the shares are redeemed.
- When shares are redeemed out of profits an amount equivalent to nominal amount of shares redeemed is to be transferred out of profits to the capital redemption reserve account. This sum should then be utilized for the purpose of redemption of redeemable preference shares. This reserve can be used to issue of wholly paid bonus shares to the members of the company.
C. Participating Preference Share or Non-Participating
Participating Preference shares are allowed to a preferential dividend at a fixed rate with the right to participate further in the profits either along with or after payment of certain rate of dividend on equity shares. A non-participating share is one which does not such right to take part in the profits of the company after the dividend and capital has been paid to the preference shareholders.