download app banner

The stake of ownership of a shareholder in a company is represented by shares. A shareholder’s portion of the interest is equally proportional to the portion of the sum paid towards the entire capital owed to the company.

It could be segregated under two broad classifications-

1. Ordinary Equity Shares

2. Preference Shares


Shares

The term ‘Share’ represents a share in the company’s capital, including the stock capital. According to subsection 84 of section 2 of the Companies Act, 2013, it is an instrument to gauge the shareholder’s interest in the assets of a company. Here we will understand the two major types such as the ordinary share and the preferential share. 

We shall further take up some of the statements and statutes that drawn up around them.

The privileges and the responsibilities of a shareholder are dictated by the Memorandum and Articles of Association of a company. According to the provisions of the Companies Act 2013, a shareholder must also possess some contractual privileges and some other privileges.

The share or debenture or any other entitlements of any of the associates of the company is declared to be transferable by Section 44 of the Companies Act, 2013. They are movable in the way specified in the Articles of the company. The numbering of each share is ratified by Section 45. Every share possesses a unique number. However, the rule is not applicable in case of individual holding rights to receive benefits on a share held by a third party. 


Kinds of Share Capital

The share capital of a company is classified into two types broadly, as per Section 43 of the Companies Act, 2013.

1. Equity Share Capital

2. Preferential Share Capital

Equity Share Capital

Equity share capital constitutes the total sum of money pitched in by the investors and owners of a company for the capital of the company. The other names for it are simply ‘equity’ or ‘share capital’ or ‘equity share’. The equity share capital of a company is calculated by multiplying the number of equity with the face-value of each share. They are of two types:

  1. Equity share with rights to vote.

  2. Equity share with differential rights to dividends, voting and the likes, according to the regulations.

Tata Motors launched equity with differential voting rights in 2008 called the ‘A’ equity share. The regulation said-

  1. There was only one voting right with every 10 ‘A’ equity.

  2. It had more dividend than the ordinary share by 5 percentage points.

The ‘A’ equity traded at a discounted price to ordinary shares with total rights to vote, due to the difference in the rights to vote.

Preferential Share Capital

Preference or Preferential Share Capital raised through issuing preference shares carry preferential rights for:

  1. Payment of Dividend: Calculated at a fixed rate of dividend which might or might not be subjected to the payment of income taxes.

  2. Repayment of Capital: Comes with preferential rights to claim assets and avail profits of any fixed premium or premium on any fixed scale during liquidation or repayment of the paid-up capital, regulated by The Memorandum or Articles of the company.


Deeming of Share Capital as Preference Capital

A deeming provision of the share capital is created by an explanation under section 43, according to which, share capital shall be deemed to be preference capital if it has both or either of the following two characteristics:

  1. Along with the preferential rights in the Dividend, the share capital has the right to fully or partially participate with capital that doesn’t have any right to participate in the preferential rights in the Dividend.

  2. If getting liquidated, in addition to the preference rights in repayment, the share capital is entitled to fully or partially participate with other capital which doesn’t have any preferential rights in the remaining surplus amount after having repaid the total capital.

However, the Memorandum or Articles of Associates of private companies could dictate if Section 43 is pertinent.

FAQs (Frequently Asked Questions)

Q1: The owner of which share enjoys more Privileges? What are the Privileges?

A1: The owner of the preference share is entitled to more privileges than the owner of the equity share. The owner of the preference share is paid his share of dividend before the owner of the equity share. During the time of winding up of the company, the preferential shareholder will be paid first by the company and then the equity shareholder shall be paid.

Q2: Is the provision of deeming capital as preferential explained under Section 43 always applicable?

A2: No, it is not. Section 43’s explanation is not applicable to private companies if the Memorandum or Articles of Associates states is irrelevant.