Q.Distinguish between equity shares and preference shares under the Companies Act, 2013.

Both are the only two kinds of share capital Section 43 recognises, but they carry opposite priorities and opposite voting positions.

The word "preference" in the name captures the whole distinction — preference shareholders come first for a fixed dividend and for capital on winding up, while equity shareholders come first (and, in practice, only) for control through voting.

Section 43 of the Companies Act, 2013 recognises exactly two kinds of share capital that a company limited by shares can issue — equity share capital and preference share capital — and the differences between them run through voting rights, dividend, and repayment of capital.

On voting, equity shareholders carry voting rights on every resolution placed before the company, in proportion to their paid-up equity capital, under Section 47(1); they are, in substance, the class through which control over the company's affairs is exercised. Preference shareholders, under Section 47(2), have no such general voting right — their vote is confined to resolutions that directly affect the rights attached to their preference shares, and, additionally, to every resolution before the company where dividend on the preference shares has remained unpaid for an aggregate period of two years or more (for cumulative preference shares, where the dividend, whether for one year or more, is in arrears for two years or more), lasting until the arrears are cleared.

On dividend, preference shareholders have a preferential right to a fixed rate of dividend, and this dividend must be paid to them, out of profits available for the purpose, before any dividend is paid to equity shareholders at all. Equity shareholders receive dividend only after this preferential claim is satisfied, and the rate of equity dividend is not fixed — it varies year to year at the discretion of the Board and shareholders, depending on profits and the company's dividend policy, whereas the preference dividend rate is fixed at the time of issue.

On repayment of capital, preference shareholders again rank ahead of equity shareholders: on a winding up, preference share capital must be repaid before any amount is paid to equity shareholders out of the company's surplus assets. Equity shareholders are the residual claimants — entitled only to what remains after preference capital, and every other class of creditor ranking above them, has been paid in full, which is also precisely why equity carries the greater commercial risk and, correspondingly, is given full voting control over how that risk is managed.

A further structural difference is that Section 55 requires every preference share to be redeemable within a fixed ceiling (twenty years generally, extendable to thirty for a permitted class of infrastructure projects) — a company limited by shares cannot issue an irredeemable preference share at all — whereas equity share capital carries no such redemption requirement and, ordinarily, remains outstanding for the life of the company.