Meaning of Shares, Features, Kinds

Share represents a unit of ownership in a company, providing the shareholder with a claim on the company’s assets and profits, as well as a proportionate interest in its management. Shareholders hold an ownership stake in the company, and the extent of their rights and privileges depends on the type and number of shares they own. Shares are primarily classified as equity shares and preference shares, each with different rights and characteristics.

The Indian Companies Act, 2013, governs the issue and regulation of shares in India, ensuring transparency and safeguarding the interests of shareholders.

Features of Shares:

• Ownership in the Company

Share represents a unit of ownership in a company, giving the shareholder a proportional stake in the business. Shareholders are considered part-owners and their liability is limited to the unpaid amount on the shares they hold. By holding shares, investors become entitled to certain rights, such as voting in general meetings, receiving dividends, and participating in major company decisions. The number of shares owned determines the degree of ownership and influence in the company. Ownership through shares also allows for easy transferability, enabling shareholders to sell or gift their holdings in accordance with the company’s Articles of Association.

• Indivisible Unit

Share is the smallest indivisible unit into which the capital of a company is divided. It cannot be split into smaller fractions for the purpose of ownership transfer. For example, if a person holds one share, it cannot be transferred partially; the whole share must be transferred. This indivisibility ensures clarity in ownership records and facilitates proper management of shareholder registers. However, a shareholder can hold multiple shares, and collectively, they may be bought, sold, or transferred. Indivisibility also helps in maintaining the legal and financial structure of the company’s capital, as per provisions in the Companies Act, 2013.

• Transferability

Shares of a public company are freely transferable, allowing investors to buy or sell them without needing prior approval from the company, subject to SEBI and stock exchange regulations. This liquidity feature makes shares an attractive investment, enabling shareholders to convert their investment into cash whenever required. In the case of private companies, the transfer of shares is restricted as per their Articles of Association, requiring board approval. Transferability promotes capital mobility, encourages wider participation in ownership, and helps companies attract investments, while also offering flexibility and choice to existing shareholders regarding the disposal of their holdings.

• Source of Income

Shares provide shareholders with income primarily in the form of dividends, which are a portion of the company’s profits distributed to owners. The amount of dividend depends on the company’s profitability and the board’s decision. In addition to dividends, shareholders can earn through capital appreciation — the increase in the market value of shares over time. However, income from shares is not guaranteed, as returns depend on business performance, market conditions, and economic factors. This potential for higher returns compared to fixed-income investments makes shares attractive, but they also carry higher risk, requiring investors to assess before investing.

• Limited Liability

One of the key features of shares is that they confer limited liability on shareholders. This means shareholders are liable to contribute only up to the unpaid value of the shares they hold. For instance, if a share is worth ₹100 and the shareholder has paid ₹80, they can only be asked to pay the remaining ₹20 in case the company faces financial distress. They are not personally liable for the company’s debts beyond this limit. This protection encourages investment in companies, as investors know their personal assets are safe from business losses or insolvency proceedings of the company.

• Classes and Types

Shares can be classified into different types, primarily equity shares and preference shares, each with distinct rights and obligations. Equity shares carry voting rights and are entitled to dividends after preference shareholders are paid. Preference shares usually do not carry voting rights but have priority in dividend payment and capital repayment on liquidation. Within these categories, further variations exist, such as cumulative preference shares, non-cumulative preference shares, redeemable preference shares, etc. This classification allows companies to design their capital structure flexibly, attracting different types of investors with varied risk appetites, income expectations, and control preferences.

Types of Shares:

Shares are broadly categorized into two main types: Equity Shares and Preference Shares. Each category serves different purposes and provides shareholders with distinct rights and privileges.

Equity Shares (also known as Ordinary Shares)

Equity shares are the most common type of shares issued by companies and represent the core ownership of the company. Shareholders holding equity shares are referred to as equity shareholders. Equity shares provide voting rights, a claim on the company’s profits (through dividends), and residual claims on the company’s assets in case of liquidation.

Key Features of Equity Shares:

• Voting Rights:

Equity shareholders have voting rights in the company’s general meetings, which allow them to participate in important corporate decisions such as the election of directors, mergers, and acquisitions.

• Dividend:

Dividends on equity shares are not fixed and depend on the company’s profitability. If a company makes a profit, it may declare dividends, but if it incurs losses, no dividend is paid.

• Residual Claims:

In the event of the company’s liquidation, equity shareholders are the last to be paid. After creditors and preference shareholders are settled, the remaining assets are distributed to equity shareholders.

• Fluctuating Returns:

Equity shareholders experience returns that fluctuate based on the company’s performance. Higher profits typically lead to better returns through dividends and capital appreciation.

Types of Equity Shares:

• Voting Equity Shares:

These shares offer voting rights to shareholders, allowing them to participate in corporate decisions.

• Non-voting Equity Shares:

In some cases, companies issue non-voting equity shares, where shareholders do not have voting rights but may receive higher dividends or other benefits.

• Bonus Shares:

These are additional shares issued to existing shareholders, usually in proportion to their existing holdings, without any additional payment. It is a way of rewarding shareholders by capitalizing retained earnings.

Preference Shares

Preference shares, as the name suggests, offer shareholders preferential treatment over equity shareholders in certain matters. Preference shareholders have a fixed dividend and have priority over equity shareholders in the event of the company’s liquidation. However, preference shareholders typically do not have voting rights, except in certain circumstances, such as non-payment of dividends.

Key Features of Preference Shares:

• Fixed Dividend:

Preference shareholders are entitled to a fixed dividend before any dividend is paid to equity shareholders, regardless of the company’s profitability.

• Priority in Liquidation:

In the event of liquidation, preference shareholders are paid before equity shareholders, although they rank after creditors.

• Limited Voting Rights:

Preference shareholders usually do not have voting rights in general meetings. However, if the company fails to pay dividends for a specified period, they may gain voting rights.

• Less Risk:

Since preference shareholders have a fixed dividend and priority during liquidation, their investment is considered less risky compared to equity shares.

Types of Preference Shares:

• Cumulative Preference Shares:

If a company is unable to pay dividends in a given year, the unpaid dividends accumulate and must be paid out in future years before any dividend is paid to equity shareholders.

• Non-Cumulative Preference Shares:

If a company does not declare dividends in a particular year, the right to receive those dividends lapses, and the shareholder cannot claim it in future years.

• Redeemable Preference Shares:

These shares can be bought back by the company after a specified period, providing a form of capital repayment to the shareholder.

• Irredeemable Preference Shares:

These shares are not subject to redemption and remain as long as the company exists.

• Convertible Preference Shares:

These shares can be converted into equity shares at a specified time and under specified conditions.

• Non-Convertible Preference Shares:

These shares cannot be converted into equity shares, and the shareholder will continue to hold preference shares for the duration.