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Types of Shares

IndianMoney.com Research Team | Updated On Monday, October 22,2018, 11:14 AM

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Types of Shares

 

 

Types of Shares

According to Section 2(84) of the Companies Act, 2013, ‘Share’ means “a share in the share capital of the company and includes stock”. In other words, a share is a portion of the interest held in a company’s assets by the shareholder. A company issues shares to the public, when it needs to raise funds for various reasons. Once shares are issued, they can be bought and sold among investors in the share market, which is a secondary market for trading shares.

Shares are securities of a company, which are transferrable in a manner prescribed by the Articles of Association of the company. When a person buys shares of a company, he becomes an owner of a part of that company. As per the Companies Act, there are two types of shares which a company can issue, namely, Equity Shares and Preference Shares.

Types of share Capital

The share capital of a company is of two types:

1. Equity Share Capital

All share capital which is not Preference Capital is Equity Share Capital. Equity shares are of two types – ‘With voting rights’, and ‘With Differential Voting Rights’.

2. Preference Share Capital

Preference Share Capital is that part of share capital that holds preferential right for:

  • Dividend payment – it is a fixed amount or amount calculated at a fixed rate. It is a sum of money paid by the company to its shareholders out of the profits. It can be paid in the form of cash or shares.
  • Repayment – In case of winding up of the company or repayment of capital, these shareholders have a preferential right to the payment of any fixed premium.

Equity Shares

In India, the term ‘Shares’ almost always refers to equity shares, as the other types of shares are rarely issued and not many people know about them. Returns on equity shares are the highest as compared to other shares, but at a higher risk to the investor. For this reason, it is one of the most attractive avenues for investment. Equity Shares are further classified into the following types:

1. With Voting Rights

This is the most common type of shares. Majority of shares traded on stock exchanges are of this type. The owners of these equity shares are entitled to dividend and voting rights.

2. Without Voting Rights / Differential Voting Rights

These shares come with voting rights that are not equal to ordinary equity shares. However, investors get compensated by higher dividends. Shares with Differential Voting Rights tend to trade at a lower value as compared to regular equity shares. The most famous of these shares is the Tata Motors DVR, which trades at a lower value than the regular share.

Preference Shares

These shares give shareholders the right to dividends and winding up benefits ahead of equity shareholders. Preference shareholders get a fixed dividend each year, whereas equity shareholders get dividends based on the profits of the company. Preference shareholders don’t have voting rights that equity shareholders enjoy. Preference shares are of the following types:

1. Cumulative and Non-cumulative Preference Shares

For example, a company has not been performing well for the past 3 years, and hence, couldn’t pay dividends to shareholders. In the 4th year, it earns substantial profits and is able to pay dividends. In this case, cumulative preference shareholders will get dividend for years 1 to 3, along with the 4th year dividend. Non-cumulative preference shareholders, however, get only the 4th year dividend.

2. Redeemable and Non-Redeemable Preference Shares

Redeemable preference shares can be redeemed or bought back by the company before winding up of the company, i.e. they have a fixed maturity. They may mature during the lifetime of the company. Non-redeemable preference shares cannot be redeemed during the lifetime of the company. Only on winding up of the company, can the shares be bought back and capital returned to investors.

3. Convertible and Non-Convertible Preference Shares

Some shares have the option to be converted to Equity shares at the option of the shareholder. Shares can be converted after a specified time if the shareholder chooses to do so. Non-cumulative shares don’t have this facility of conversion. In this regard, convertible shares are more preferable.

4. Participating and Non-Participating Preference Shares

In case of winding up of the company, outsider liabilities such as creditors and debentures are paid off first, then the preference shareholders, and finally equity shareholders. After this, if there is any surplus, it is distributed equally among the equity shareholders and participating preference shareholders. Preference shares which do not have rights on any surplus on winding up of the company are called Non-participating Preference Shares.

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.

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