A share is the smallest unit into which the share capital of a company is divided. It represents a fraction of the ownership of the company and gives the shareholder certain rights, such as the right to receive dividends and participate in the management of the company through voting.
For example, if a company's total capital of ₹5,00,000 is divided into 10,000 units of ₹50 each, each unit is called a share. Every share has a distinct number for identification purposes.
According to the Articles of Association of a company, shares are movable property and are generally transferable. They are treated as goods under the Sale of Goods Act, 1930, which means they can be bought, sold, transferred, pledged (hypothecated), or inherited
Types of Shares
A company may issue two types of Shares under Section 43 of the Companies Act, 2013. They are:
- Preference Shares
- Equity Shares
1. Preference Shares
Preference shares are a type of shares that carry preferential rights over equity shares. The holders of preference shares receive a fixed rate of dividend before any dividend is paid to equity shareholders. In case of winding up of the company, preference shareholders have the priority to receive repayment of capital before equity shareholders. In some cases, they may also have the right to participate in excess profits after equity shareholders have received a specified dividend or may receive a premium at the time of redemption of shares, depending on the terms of issues
Features of Preference Shares:
- Steady income: Preference shares provide steady income and shareholders get a fixed rate of return and safety of investment.
- No Voting Right: Preference Shareholders do not have any voting rights and say in the management.
- Preferential Right of Repayment: Preference shareholders have a preferential right of repayment over equity shareholders in the event of the liquidation of a company.
- No Assured Return: Shareholders do not have assured return as the dividend on these shares is to be paid only when the company earns profit.
- Less Risk: Less risk is involved in case of preference shares and that is why it is not suitable for investors who are willing to take risks for higher return.
Types of Preference Shares
On the basis of Arrears of Dividend:
- Cumulative Preference Shares: Shares in which the shareholders are entitled to recover the arrears of preference dividend before any dividend is paid on equity are known as Cumulative Preference Shares. In such shares, if the profits of the company in any year are insufficient to pay dividend on these shares, the dividend keeps on accumulating until it is fully paid. The arrears of dividend on these shares are shown in the balance sheet under 'Contingent Liability and Commitments'.
- Non-Cumulative Preference Shares: When the holders of shares get a fixed amount of dividend out of the profits of each year, such shares are known as Non-Cumulative Preference Shares. Such shareholders get nothing, nor they can claim unpaid dividend of any year in any subsequent year if no dividend is declared due to any reason.
On the basis of Share in Profits:
- Participating Preference Shares: The shares which allow the shareholders to participate in the surplus profits, if any, after dividend at a stipulated rate has been paid to equity shareholders, in addition to the fixed preference dividend. Such shares are known as Participating Preference Shares.
- Non-Participating Preference Shares: Shares that get only a fixed rate of dividend every year and do not carry a right to participate in the surplus profits or in any surplus on winding up of the company is known as Non-Participating Preference Shares.
On the basis of Convertibility:
- Convertible Preference Shares: The shares which can be converted into equity shares as per the terms of issue, are known as Convertible Preference Shares.
- Non-Convertible Preference Shares: The shares which cannot be converted into equity shares are known as Non-Convertible Preference Shares.
On the basis of Redemption:
- Redeemable Preference Shares: The shares which will be repaid by the company within a stipulated period in accordance with the terms of issue and the fulfilment of certain conditions laid down in Section 55 of the Companies Act 2013, are known as Redeemable Preference Shares.
- Irredeemable Preference Shares: The shares in which the capital cannot be refunded before winding up is known as Irredeemable Preference Shares.
2. Equity Shares
Shares which are paid dividends only when profits are left after the preference shareholders have been paid fixed rate of dividends is known as Equity Shares. There is no fixed rate of dividend in case of equity shares. The equity shareholders receive nothing if in any year there are no profits or insufficient profits. They get a higher rate of dividend when the company earns more profits. Equity share capital is returned only when preference share capital is returned in full. Equity shareholders have voting rights and control the affairs of the company.
Features of Equity Shares:
- Right to vote: Equity shareholders have right to vote and can participate in the management of the business.
- Permanent Capital: Equity shares are permanent capital of the business, as it is to be repaid only at the time of liquidation of a company.
- No charge on Assets: When funds are raised using equity shares, then there is no charge on the assets of the company.
- Higher Risks: Equity shares involve higher risks and are suitable for investors who are willing to take risk for higher returns.
- Costly: It is more costly than other sources of funds.
- Creditworthiness: It provided creditworthiness to the company and confidence to prospective loan providers.