The stake of ownership of a shareholder in a company is represented by shares. A shareholder’s portion of the interest is equally proportional to the portion of the sum paid towards the entire capital owed to the company.
It could be segregated under two broad classifications-
1. Ordinary Equity Shares
2. Preference Shares
Shares
The term ‘Share’ represents a share in the company’s capital, including the stock capital. According to subsection 84 of section 2 of the Companies Act, 2013, it is an instrument to gauge the shareholder’s interest in the assets of a company. Here we will understand the two major types such as the ordinary share and the preferential share.
We shall further take up some of the statements and statutes that drawn up around them.
The privileges and the responsibilities of a shareholder are dictated by the Memorandum and Articles of Association of a company. According to the provisions of the Companies Act 2013, a shareholder must also possess some contractual privileges and some other privileges.
The share or debenture or any other entitlements of any of the associates of the company is declared to be transferable by Section 44 of the Companies Act, 2013. They are movable in the way specified in the Articles of the company. The numbering of each share is ratified by Section 45. Every share possesses a unique number. However, the rule is not applicable in case of individual holding rights to receive benefits on a share held by a third party.
Kinds of Share Capital
The share capital of a company is classified into two types broadly, as per Section 43 of the Companies Act, 2013.
1. Equity Share Capital
2. Preferential Share Capital
Equity Share Capital
Equity share capital constitutes the total sum of money pitched in by the investors and owners of a company for the capital of the company. The other names for it are simply ‘equity’ or ‘share capital’ or ‘equity share’. The equity share capital of a company is calculated by multiplying the number of equity with the face-value of each share. They are of two types:
Equity share with rights to vote.
Equity share with differential rights to dividends, voting and the likes, according to the regulations.
Tata Motors launched equity with differential voting rights in 2008 called the ‘A’ equity share. The regulation said-
There was only one voting right with every 10 ‘A’ equity.
It had more dividend than the ordinary share by 5 percentage points.
The ‘A’ equity traded at a discounted price to ordinary shares with total rights to vote, due to the difference in the rights to vote.
Preferential Share Capital
Preference or Preferential Share Capital raised through issuing preference shares carry preferential rights for:
Payment of Dividend: Calculated at a fixed rate of dividend which might or might not be subjected to the payment of income taxes.
Repayment of Capital: Comes with preferential rights to claim assets and avail profits of any fixed premium or premium on any fixed scale during liquidation or repayment of the paid-up capital, regulated by The Memorandum or Articles of the company.
Deeming of Share Capital as Preference Capital
A deeming provision of the share capital is created by an explanation under section 43, according to which, share capital shall be deemed to be preference capital if it has both or either of the following two characteristics:
Along with the preferential rights in the Dividend, the share capital has the right to fully or partially participate with capital that doesn’t have any right to participate in the preferential rights in the Dividend.
If getting liquidated, in addition to the preference rights in repayment, the share capital is entitled to fully or partially participate with other capital which doesn’t have any preferential rights in the remaining surplus amount after having repaid the total capital.
However, the Memorandum or Articles of Associates of private companies could dictate if Section 43 is pertinent.
FAQs on Types of Shares: An Overview
1. What are the two primary types of shares a company can issue according to the CBSE Class 12 syllabus for 2025-26?
According to the Companies Act, 2013, a company can issue two primary types of shares: Equity Shares and Preference Shares. Equity shares represent ownership capital and come with voting rights, while preference shares carry preferential rights regarding dividend payment and capital repayment.
2. What is the key difference between an equity shareholder and a preference shareholder in terms of rights and risks?
The key differences lie in voting rights, dividend payments, and risk exposure. Equity shareholders are the real owners, have voting rights, and receive dividends that are not fixed. They bear the highest risk. In contrast, preference shareholders generally do not have voting rights but receive a fixed rate of dividend before any dividend is paid to equity shareholders. Their risk is lower as they also get priority in capital repayment during the company's winding up.
3. What are the eight different types of Preference Shares a company can issue?
Preference shares are classified into eight types based on four criteria:
- On the basis of dividend accumulation: Cumulative and Non-Cumulative Preference Shares.
- On the basis of participation in profits: Participating and Non-Participating Preference Shares.
- On the basis of conversion: Convertible and Non-Convertible Preference Shares.
- On the basis of redemption: Redeemable and Irredeemable Preference Shares.
4. Why would a company choose to issue preference shares instead of equity shares?
A company might issue preference shares for several strategic reasons. Firstly, it allows the company to raise capital without diluting the control of existing equity shareholders, as preference shares typically do not carry voting rights. Secondly, it can attract more cautious investors who prefer a fixed return and lower risk. Lastly, the dividend on preference shares is payable only out of profits, giving the company financial flexibility during periods of loss.
5. Are Bonus Shares and Rights Shares the same as regular Equity Shares? Explain the difference.
While both result in more equity shares, they are fundamentally different. A Rights Issue is an offer to existing shareholders to buy additional shares at a specified price, usually below the market price. It is an invitation to invest more money. A Bonus Issue, on the other hand, involves distributing free additional shares to existing shareholders, paid for out of the company's accumulated reserves and profits. It does not bring new cash into the company but capitalises existing profits.
6. Under what circumstances can a preference shareholder gain voting rights in a company?
While preference shareholders do not normally have voting rights, they can acquire them under specific conditions as per the Companies Act, 2013. They can vote on resolutions that directly affect their rights or relate to the winding up of the company. Furthermore, if the dividends on their shares have not been paid for a continuous period of two years or more, they gain the right to vote on all resolutions put before the company at any general meeting.
