Nature and Classes of Shares

Shares are units of ownership that divide a company's total capital among investors. They represent legal claims to a company's assets and earnings, giving shareholders both rights and responsibilities. Understanding the different types of shares is crucial for investors to make informed decisions about their investments.

Types of Shares

According to the Companies Act 2013, there are primarily two types of shares that a company can issue:

• Preference Shares shares with preferential rights in dividend payment and liquidation
• Equity Shares shares representing ownership with voting rights but no preferential treatment

Preference Shares

Preference shares, as the name suggests, have preference over equity shares in two key areas. Preference shareholders receive priority in dividend distribution and must be paid before equity shareholders. Additionally, during company liquidation, preference shareholders have first claim on company assets after creditors are paid.

However, preference shareholders typically do not have voting rights in company matters. Preference shares can be further classified as:

• Redeemable/Non-redeemable can or cannot be bought back by the company
• Cumulative/Non-cumulative dividend arrears accumulate or are forfeited
• Participating/Non-participating can or cannot share in surplus profits

Equity Shares

Equity shares represent true ownership in a company. Equity shareholders do not enjoy preference in dividend payment or liquidation proceeds. The dividend payment depends entirely on the board of directors' decision and company profitability. If no dividend is declared, equity shareholders receive nothing for that year.

The key advantage of equity shares is voting rights. Generally, each share carries one vote, allowing shareholders to participate in company governance. Companies cannot legally issue non-voting equity shares.

Share Issuance Process

The Companies Act 2013 provides strict guidelines for share issuance, which follows these steps:

Issue of Prospectus

Companies must publish a prospectus containing complete financial information, including balance sheets, profit and loss statements, and planned capital utilization. This document helps investors make informed decisions about subscribing to shares.

Receipt of Applications

Potential shareholders submit applications with required payments to designated banks. The application process cannot exceed 120 days. If minimum subscription is not achieved within this period, all money must be returned within 130 days.

Allotment of Shares

Upon achieving minimum subscription, shares are allotted to applicants. In case of oversubscription, shares are distributed on a pro-rata basis. Companies issue allotment letters formalizing the contract between company and shareholders.

Comparison of Share Types

Advantages and Limitations

Preference Shares: Provide stable income and lower risk but offer limited growth potential and no voting rights.

Equity Shares: Offer voting rights and unlimited growth potential but carry higher risk and uncertain dividend payments.

Conclusion

Understanding share types is essential for making informed investment decisions. Preference shares offer stability and priority, while equity shares provide ownership and growth potential. Investors should choose based on their risk tolerance and investment objectives.

FAQs

Q1. What are shares of a company?

Shares are units of ownership that divide a company's total capital among investors, representing legal claims to the company's assets and earnings.

Q2. How many types of shares are there and what are they called?

There are two main types of shares: preference shares and equity shares, each with different rights and characteristics.

Q3. What preferences do preference shareholders get?

Preference shareholders receive priority in dividend payments and first claim on company assets during liquidation, but they typically do not have voting rights.

Q4. Can preference shares accumulate dividends?

Yes, cumulative preference shares accumulate unpaid dividends, while non-cumulative preference shares do not carry forward unpaid dividends to future years.

Q5. Why do equity shareholders have voting rights?

Equity shareholders have voting rights because they are true owners of the company and bear the highest risk, giving them the right to participate in major company decisions.