Classes of Shares — Equity Shares and Preference Shares

Section 43 of the Companies Act, 2013 recognises only two classes of share capital a company limited by shares can issue: equity share capital and preference share capital. Every share issued by such a company falls into one of these two classes.

Equity Shares. Equity shares are shares which are not preference shares. They form the real ownership capital of the company and carry the residual risks and rewards of the business.

• Equity shareholders get dividend only after preference shareholders have been paid their fixed dividend, and only if the company's Board recommends a dividend that year — there is no guaranteed rate.
• The rate of dividend is not fixed — in a highly profitable year, equity shareholders may receive a much higher rate than any preference shareholder; in a loss year, they may receive nothing at all.
• On winding up, equity shareholders are repaid after preference shareholders and all outside liabilities have been settled.
• Equity shareholders normally carry voting rights in proportion to the shares held, and so control the company through the general meeting.

Preference Shares. As the name suggests, preference shares carry two specific 'preferential' rights over equity shares under Section 43: (i) a preferential right to a fixed rate of dividend, to be paid before any dividend is paid to equity shareholders, and (ii) a preferential right to repayment of capital on winding up, before equity shareholders are repaid.

• The rate of dividend on preference shares is fixed (e.g., '9% Preference Shares') and does not rise even if the company earns very high profits in a year.
• Preference shareholders generally do not have voting rights on ordinary company matters — voting rights arise only in specific circumstances, such as when their own dividend remains unpaid for a prescribed period, or on resolutions directly affecting their class rights.
• Preference shares may further be classified as cumulative/non-cumulative (whether unpaid dividend accumulates and must be paid in a later profitable year), participating/non-participating (whether they share in surplus profits beyond their fixed rate), and convertible/non-convertible (whether they can be converted into equity shares) — the syllabus expects a student to be aware these variants exist, even though their detailed accounting is not required at this stage.

A simple comparison.

| Basis | Equity Shares | Preference Shares |

|---|---|---| …