Commercial Correspondence and Secretarial Practice · Ch 1 — Issue of Shares
Meaning and Kinds of Shares
Meaning and Kinds of Shares
A share is the smallest unit into which a company's share capital is divided, and it represents the shareholder's proportionate ownership interest in the company along with a corresponding bundle of rights — to vote, to receive dividend, and to share in surplus assets on winding up. Section 43 of the Companies Act, 2013 recognises only two broad kinds of share capital that a company limited by shares may issue: equity share capital and preference share capital. This chapter looks at the secretarial side of issuing these shares — the legal procedure a company follows from deciding to raise capital through to handing a shareholder a share certificate — and deliberately leaves the accounting entries (journalising application, allotment, and calls money) to Accountancy, where that half of the topic properly belongs.
Equity share capital is share capital that is not preference share capital. Under Section 43, equity shares may further carry differential rights as to dividend, voting, or otherwise, in accordance with rules prescribed by the Central Government — meaning a company is not restricted to a single uniform class of equity shares, though any variation must be authorised by its articles and follow the prescribed conditions. Equity shareholders are, in substance, the residual owners of the company: they carry full voting rights in proportion to their shareholding under Section 47, receive dividend only after preference shareholders are paid, and bear the greatest share of the commercial risk and reward of the business.
Preference share capital, by contrast, is capital that carries two preferential rights: a preferential right to a fixed rate of dividend before any dividend is paid to equity shareholders, and a preferential right to repayment of capital on winding up before equity shareholders are repaid. Preference shares generally do not carry voting rights on ordinary business, except in specified circumstances under Section 47(2) — namely, on resolutions directly affecting their own rights, and, where dividend has remained unpaid for two years or more (or, for cumulative preference shares, is in arrears for that period), on every resolution placed before the company, until the arrears are cleared. Section 55 additionally restricts a company limited by shares from issuing any preference share that is irredeemable, and caps the redemption period at twenty years from the date of issue (extendable up to thirty years for certain infrastructure projects, subject to conditions), so that preference capital always has a defined exit rather than remaining locked into the company indefinitely.
Preference shares themselves come in several recognised varieties, distinguished by the specific terms attached to the dividend and capital-repayment rights:
| Type of preference share | What distinguishes it |
|---|---|
| Cumulative | Unpaid dividend in a lean year accumulates and must be paid in full, along with the current year's dividend, before any dividend reaches equity shareholders in a profitable year. |
| Non-cumulative | Dividend not paid in a particular year lapses for that year and does not carry forward as an arrear. |
| Participating | In addition to the fixed preferential dividend, carries a further right to participate in surplus profit (and sometimes surplus assets on winding up) along with equity shareholders. |
| Non-participating | Confined strictly to the fixed preferential dividend, with no further share in surplus profits or assets. |
| Convertible | Carries an option, exercisable on terms fixed at issue, to convert into equity shares after a specified period. |
| Non-convertible | Cannot be converted into equity shares under any circumstance and remains preference capital until redeemed. |
| Redeemable | Repayable by the company after a fixed period or on a specified event, within the twenty (or, for the permitted class, thirty) year ceiling Section 55 lays down. |
A company may combine these features — for instance, a "cumulative convertible preference share" — so long as the combination is authorised by the articles and the terms are clearly stated in the resolution and offer document under which the shares are issued. Getting this classification right is the foundation for everything that follows in this Gujarat board Std 12 Secretarial Practice chapter on the issue of shares, because the legal procedure that must be followed, and the rights that attach once shares are allotted, both depend on which kind of share capital is actually being issued.
Under Section 43 of the Companies Act, 2013, all share capital of a company that is not preference share capital. Equity shareholders carry full voting rights under Section 47 and are the residual claimants on dividend and, on winding up, on surplus assets — paid only after preference shareholders' preferential rights are satisfied.
Share capital carrying a preferential right, under Section 43, to a fixed dividend before equity shareholders and to repayment of capital before equity shareholders on winding up. Section 55 bars issuing irredeemable preference shares and caps redemption at twenty years (thirty for a permitted infrastructure class), and Section 47(2) restricts preference shareholders' voting rights to matters directly affecting their own rights and, where dividend is in arrears for the prescribed period, to every resolution.