Q.Distinguish between equity shares and preference shares.

Every difference between equity and preference shares ultimately traces back to one fact: preference shares carry preferential rights that equity shares deliberately do not.

Equity shares and preference shares are the only two kinds of share capital a company limited by shares may issue under Section 43 of the Companies Act, 2013, and every difference between them flows from a single defining fact: preference shares carry preferential rights that equity shares, by definition, do not.

As to dividend, equity shareholders receive a fluctuating rate of dividend, paid only if the company earns profit and the Board recommends it, and only after preference dividend has been paid in full; preference shareholders receive dividend at a fixed rate, decided at the time of issue, and paid ahead of any equity dividend. As to repayment of capital, equity shareholders are paid last on winding up, receiving only what remains once every other claim, including that of preference shareholders, has been satisfied; preference shareholders are paid ahead of equity shareholders, though still after all creditors and debenture-holders. As to voting rights, equity shareholders ordinarily carry full voting rights and elect the company's Board of Directors, giving them real control over the company; preference shareholders ordinarily carry no voting rights at all, gaining a vote only on resolutions directly affecting their own class of shares, or where their dividend has remained unpaid for two years or more. As to risk, equity shareholders bear the company's maximum risk, since their return has no floor and no ceiling, which is why equity capital is called venture or risk capital; preference shareholders bear comparatively less risk, since their return is fixed and prioritised, attracting a more cautious class of investor. As to redemption, equity share capital is permanent and irredeemable during the company's lifetime; preference share capital, by contrast, must always be redeemable, since Section 55(1) of the Companies Act, 2013 prohibits the issue of irredeemable preference shares. As to bonus and rights issues, only equity shareholders are …

Students sometimes state that preference shareholders 'never' get voting rights, overlooking the two genuine exceptions: resolutions directly affecting their own class of shares, and any meeting held while their dividend remains unpaid for two years or more. Another common slip is r …