Types of shares

As per the provision of section 85 of the Companies Act, 1956, the share capital of a company consists of two classes of shares, namely:

  • Preference Shares
  • Equity Shares

1)Preference Shares:
According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the following two preferential rights:

(a) The payment of dividend at fixed rate before paying dividend to equity shareholders.
(b) The return of capital at the time of winding up of the company, before the payment to the equity shareholder.
Both the rights must exist to make any share a preference share and should be clearly mentioned in the Articles of Association.
Preference shareholders do not have any voting rights, but in the following conditions they can enjoy the voting rights:
(1) In case of cumulative preference shares, if dividend is outstanding for more than two years.
(2) In case of non-cumulative preference shares, if dividend is outstanding for more than three years.
(3) On any resolution of winding up.
(4) On any resolution of capital reduction.

Types of preference shares:
In addition to the aforesaid two rights, a preference shares may carry some other rights. On the basis of additional rights, preference shares can be classified as follows:

Cumulative Preference Shares:

Cumulative preference shares are those shares on which the amount of divided if not paid in any year, due to loss or inadequate profits, then such unpaid divided will accumulate and will be paid in the subsequent years before any divided is paid to the equity share holders. Preference shares are always deemed to be cumulative unless any express provision is mentioned in the Articles.

Non-Cumulative Preference Shares:

Non-cumulative preference shares are those shares on which arrear of dividend do not accumulate. Therefore if divided is not paid on these shares in any year, the right receive the dividend lapses and as such, the arrear of divided is not paid out of the profits of the subsequent years.

Participating Preference Shares:

Participation preference shares are those shares, which, in addition to the basic preferential rights, also carry one or more of the following rights:
(a) To receive dividend, out of surplus profit left after paying the dividend to equity shareholders.
(b) To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company.
Non-Participating Preference Shares: Non-participation preference shares are those shares, which do not have the following rights:
(a) To receive dividend, out of surplus profit left after paying the dividend to equity shareholders.
(b) To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company.
Preference shares are always deemed to be non-participating, if the Article of the company is silent.

Convertible Preference Shares:

Convertible preference shares are those shares, which can be converted into equity shares on or after the specified date according to terms mentioned in the prospectus.

Non-Convertible Preference Shares:

Non-convertible preference shares, which cannot be converted into equity shares. Preference shares are always being to be non-convertible, if the Article of the company is silent.

Redeemable Preference Shares:

Redeemable preference shares are those shares which can be redeemed by the company on or after the certain date after giving the prescribed notice. These shares are redeemed in accordance with the terms and sec. 80 of the Company’s Act 1956.

Irredeemable Preference Shares:

Irredeemable preference shares are those shares, which cannot be redeemed by the company during its life time, in other words it can be said that these shares can only be redeemed by the company at the time of winding up. But according to the sec. 80 (5A) of the Company’s (Amendment) Act 1988 no company can issue irredeemable preference shares.

2)Equity shares:

According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the share, which is not preference shares. In other words equity shares are those shares, which do not have the following preferential rights:
(a) Preference of dividend over others.
(b) Preference for repayment of capital over others at the time of winding up of the company.
These shares are also known as ‘Risk Capital’, because they get dividend on the balance of profit if any, left after payment of dividend on preference shares and also at the time of winding up of the company, they are paid from the balance asset left after payment of other liabilities and preference share capital. Apart from this they have to claim dividend only, if the company in its A. G. M. declares the dividend. The rate of dividend on such shares is not pre-determined, but it depends on the profit earned by the company. The equity shareholders have the right to vote on each and every resolution placed before the company and the holders of these shares are the real owners of the company.