Accountancy · Ch 6 — Accounting for Share Capital
Nature and Classes of Shares
Nature and Classes of Shares
A share is the smallest unit into which a company’s total share capital is divided. If you own one share, you own a fractional part of the company’s capital. The people who buy these shares are called shareholders — they are the owners of the company.
The Memorandum of Association states the total authorised capital of the company and the number of shares into which that capital is split. However, the Articles of Association go further: they specify the different classes of shares the company can issue, and the rights and obligations attached to each class.
Under The Companies Act, a company can issue only two types of shares:
- Preference shares
- Equity shares (also called ordinary shares)
The distinction between these two classes is fundamental. Preference shares get priority over equity shares in two key areas: dividend payment and repayment of capital in case of winding up. Equity shares carry the residual risk and reward — they get whatever is left after preference shareholders have been paid.
Preference Shares
Preference shares carry a preferential right to:
- Receive a fixed rate of dividend before any dividend is paid to equity shareholders.
- Repayment of capital before equity shareholders if the company is wound up.
The dividend on preference shares is usually a fixed percentage of the face value (e.g., 9% Preference Shares of ₹100 each). Preference shareholders do not have voting rights in normal circumstances, though they may get voting rights if their dividend is unpaid for a specified period.
Equity Shares
Equity shares are the ordinary shares of the company. They do not carry any preferential right. Their holders:
- Receive dividend only after preference shareholders have been paid their fixed dividend.
- Get back their capital only after preference shareholders have been repaid in full on winding up.
- Bear the maximum risk — if the company makes losses, they may get nothing. …