Company Law

Shares – Meaning, Definition And Types Of Shares

Share – The literal meaning of share’ is part’ or ‘portion’. But in the context of share-capital of a company, share has a special meaning. The share capital of a company is divided into different classes of parts and each part is called a share. For example, if the capital of a company is 50,00,000, and is divided into 50,000 parts of 100 each, then each such part of the capital would be called a share.

  • Definition: According to Section 2(4) of the Companies Act, 2013 ‘share’ means share in the share capital of a company, and includes stock except where a distinction between stock or share is expressed or implied.
  • According to Justice Farewell, ” A share is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place, and of interest in the second.”

Types of Shares

According to the Companies Act, 1956, the share capital of a company limited by shares formed after the commencement of the Act, or issued after such commencement, consists of two kinds/types of shares

(A) Equity Shares

An equity share is also called an ordinary’ share. According to Section 43 of the Companies Act, 2013 all shares of a company which are not preference shares are equity or ordinary shares. Equity shares constitute the major portion of the share of a company having share capital. The dividend on equity shares, and the return of capital in case of winding up of the company, is paid on equity shares after it has been paid on preference shares.

After having paid the dividend to preferential shareholders (if any) at a fixed rate, the remaining profit of the company is distributed to its equity shareholders. Equity shareholders of a company with share capital get a share of the company’s profit only if, after the dividend has been paid to preference shareholders, there is any profit remaining with the company. If no part of the profit is left with the company after having paid dividend to preferential shareholders, the holders of equity share get no dividend. This is the reason the capital invested in equity shares is often referred to as risk capital’. the fate of equity shareholders of a company is directly linked to whether or not the company is successful in its business.

If the company does well and makes a profit, the equity shareholders get a dividend; if it does o that of equity shareholders. If the company does very well and makes extraordinary not, the risk is also that of equity shareholders. If the company does very well and makes extraordinary profit, the biggest gainers are the equity shareholders. This is the first types of shares.

In contrast to this, the rate of dividend for the holders of equity shares is not pre-defined, and is defined only by the directors of the company-which implies that, even if the company makes substantial profit, and the directors have recommended that a major part of the profit goes to the holders of the preference shares, the holders of equity shares get almost nothing, Likewise, the capital return in the eve of the company being wound up is made first to the holders of preferential shares and then to the holders of equity shares.

(B) Preference Shares

This is the second types of shares. These are the shares that have referential rights as to the payment of dividend and return of capital on winding up of the company. The holders of preference shares have the prior right to receive the dividend at a fixed rate. They receive the dividend before any dividend is paid to holders of other classes of shares. The rate of the dividend is fixed, under the provisions of the Act, when the shares are issued. The shareholders of preference shares are not entitled to any additional dividend than what is fixed at the time of the allotment of shares, no matter how much profit the company makes. By preferential right in respect of repayment of capital’ is meant that, in the first instance, the capital is repaid to the holders of preferential shares among the company’s shareholders. If there is any amount of capital remaining with the company after such repayment, it is paid to the holders of other classes of shares.

It is clear from what has been said that only the shares that have the above two characteristics are preferential shares. Even if one of the characteristics is lacking, the shares cannot be said to be preferential-they would be termed to be ordinary shares.

Kinds/Types of Preferential Shares

(1) Simple or Non-cumulative Preference Shares: Such preferential shares carry the right that the dividend is paid on them at the fixed rate before any dividend is paid on other types of shares-but such dividend is paid only in a year when the company makes a profit. These shares do not carry the right to receive any arrears of the dividend in a particular year in case the company has not declared any dividend in the previous year or years. Even though the holders of such shares have the preferential right to receive the dividend, they do not have the right to demand any dividend that has not been paid for the preceding years.

(2) Cumulative Preference Shares: These shares also carry the right to preferential payment of dividend at a fixed rate compared to other types of shares. In addition, they carry the right to the accumulated arrears of dividend. If the holders of such shares are not paid any dividend in a particular year, their right to receive the dividend does not end, and the accumulated arrears of dividend is paid to them if any dividend is declared in the subsequent years. The holders also have the right to receive the arrears of dividend before any dividend is paid to equity shareholders. Only when the dividend has been paid on such shares then the other shareholder receive any dividend.

Here, the question that arises is-how do we determine whether a preference share is cumulative or non-cumulative? All preference shares are presumed to be cumulative unless the articles of the company or the terms of issue state the contrary.

In the case of Foster Vs. Coles, the company had issued cumulative preference shares, but later it deleted the word ‘cumulative’ by altering its articles. It was held by the Court that, since there was no clear provision to the contrary in the company’s articles, the shares remained to be cumulative despite such deletion.

(3) Convertible Preference Shares: These are the shares that carry the right of the holder, if he so desires, to convert his shares, within a specified period or by a specific date, into Equity shares.

(4) Non-convertible Preference Shares: The holder of such preferential shares does not have the right to convert his shares into equity shares. If nothing to the contrary is stated in the articles of the company, all preferential shares are deemed to be non-convertible.

(5) Redeemable Preference Shares: Such shares on which the capital can be paid back to the holders after a specific time during the life-time of the company are called redeemable shares’.

(6) Irredeemable Preference Shares: Such preference shares of a company which cannot be redeemed are called irredeemable preference shares.

(7) Participating Preference Shares: Such shares, besides being entitled to receive the dividend at the specified rate, also carry the right to participate in receiving a share in the other profits of the company. By other profits’ is implied the profits that remain with the company after it has distributed the dividends to various classes of shareholders.

(8) Non-participating Preference Shares: These shares carry the right to receive the dividend at a fixed rate before any dividend is paid to other types of shareholders; but they do not entitle the holder of shares to participate in receiving any share in the company’s other profits.

(9) Guaranteed Preference Shares: Such shares are the ones that are guaranteed to receive the dividend at a fixed rate and for a fixed period. After the expiry of the specified period, these shares are converted to ordinary preference shares Guaranteed Preference Shares are issued by a company in certain specific situations-like the conversion of a private company to a public company, a change in the company’s management or for the improvement of the company financial position.

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