Meaning of Shares, Kinds of Shares

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.

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.