Shares that are generally termed as Securities as per Companies act,2013, are one of the financial instruments used to raise the funds for the company. Shares represent the ownership interest in a company or financial assets which gives an equal distribution of profits if any declared in form of dividends.
The shares are broadly divided into two types, which are
- Equity Shares
- Preference Shares
Equity Shares are the shares that don’t have any preferential rights with regards to repayment of capital and dividend. As per Companies act, equity Shares are defined as the shares other than preference shares are equity shares. Equity Shares bear a higher risk than preference shares.
Equity Shares are further divided as equity Shares with the same voting rights and equity Shares with differential voting rights.
Equity shares with differential voting rights are like ordinary shares having differential rights with regards to dividend or voting rights or if any other.
In India, only a few companies have issued shares with differential voting rights such as Tata Motors, Future Retail.
To issue equity shares with differential voting rights the company has to satisfy certain conditions as specified under Rule 4 of the Companies (share capital and Debenture) Rules, 2014.
Preference shares are the shares having preferential rights with regards to the dividend payment and preferential rights in repayment of the capital during the winding up of the company. Most of the preference shares possess a fixed or absolute rate of a dividend where a common share does not possess such preferential rights. Preferential rights do not have voting rights and are less risky when compared to that of equity shares.
Preference shares are further classified on the following basis
- On the basis of Dividend Payout
- Cumulative Preference shares
- Non-Cumulative Preference shares
- Participatory Preference shares
- Non-Participatory Preference shares
- On the basis of Convertibility
- Convertible Preference shares
- Non-Convertible Preference shares
- On the basis of Redeemability
- Redeemable Preference shares
- Irredeemable Preference shares
Cumulative preference shares are a kind of shares where the arrears of dividends are in the nature of cumulative and such arrears are paid before paying any dividend to equity shareholders.
Non-Cumulative Preference shares
Non-cumulative preference shares are the kind of shares where the dividend is paid only from the net profits of each year. In case of no profits in any of the years, the arrears of dividends of such years cannot be claimed in the subsequent years. The dividend shall lapse on the preference shares if such dividend is not paid by the company during the particular year. Preference shares are presumed to be cumulative unless specifically stated as non-cumulative.
Participating preference shares are the kind of shares that are entitled to participate in the balance of profits with equity shareholders in addition to the fixed or absolute rate of preference dividend. During the winding-up of the company, participating preference shares shall also have a right to have a part in the surplus assets of the company. Such right shall be expressly stated in the memorandum or articles of association of the company.
Non- participating preference shares are the kind of a share which is entitled only to a fixed rate of dividend and does not possess any right to participate in the surplus profits. The preference shares are presumed to be non-participating unless the terms are specifically stated in the memorandum or the articles of association of the company or the in the terms of issue.
Convertible preference shares are the kind of shares that can be converted into equity shares within or after a certain period.
Non-convertible preference shares are the kind of shares that do not have a right to be converted into equity shares.
Redeemable preference shares are the kind of shares which can be redeemed within or after a certain period
Irredeemable preference shares are the kind of shares that do not have a right to redeem.