The most common classes of shares are:
Preference,
Equity or Ordinary, and
Deferred or Founders’.
Classes Of Shares:
The most
common classes of shares are:
I. Preference,
II. Equity or Ordinary, and
III. Deferred or Founders’.
I . Preference Share:
A preference share is one which
carries the following two rights over holders of equity shares: (i) a
preferential right in respect of dividends at a fixed amount or at a fixed
rate, and (ii) a preferential right in regard to repayment of capital on
winding up.
The preference or priority of the
preference shareholders is in relation to the rights of equity shareholders
[Section 85].
Participating
and Non-participating : If a preference share carries either one or both of the
following rights then it is known as participating share:
1. To participate further in the profits either along
with or after payment of a certain rate of dividend on equity shares,
2. To participate in the surplus assets at the time of
winding up [Section 85].
Thus, if a preference share does not carry either of
these rights, then it will be known as non-participating share .
Preference shares are divided into
A. Cumulative preference share
B. Non-cumulative preference share
C. Cumulative convertible preference shares
D. Redeemable preference share
E. Irredeemable preference share
A. Cumulative preference share
If
a preference share carries the right for payment of arrears in dividend from
future profits, then such a share is known as cumulative preference share.
B. Non-cumulative Preference share
If
a preference share does not carry the right to dividend in arrears, then such a
preference share is known as non-cumulative or simple. The preference shares are always presumed to be cumulative
unless expressly described as non-cumulative.
C. Cumulative Convertible Preference Shares (ccps):
Such shares are issued as
preference shares but are convertible into equity shares within a period of 3
years to 5 years, as may be decided by the company
D.Redeemable and Irredeemable :
Redeemable preference shares are
those shares which are to be redeemed by the company either at a fixed date, or
after a certain period of time or at the option of the company as per Section
80.
Conditions:
Shares issued earlier cannot be
converted into redeemable preference shares: There must be authority in the
articles. The shares can be redeemed only when they are fully paid up; it will
only be redeemed:
out of profits of the company which would otherwise be available for
dividend, or (b) out of the proceeds of a new issue of shares.
If
there is a premium payable on redemption, it must have been provided out of
profits or out of the securities premium account before the shares are
redeemed. Where the shares are redeemed out of profits, a sum equal to the
nominal amount of the shares redeemed is to be transferred out of profits to
the “Capital Redemption Reserve Account.”
Voting Rights Of Preference Shareholders:
The
preference shareholders will vote only on matters directly relating to
preference shares;
1. Any resolution for winding up of the company,
2. Any resolution for the reduction or repayment of
share capital,3. Any
resolution at any meeting, if dividend on cumulative preference shares remains
unpaid for at least two yearsII. Equity Share:
‘Equity share’ means a share
which is not a preference share [Section 85]. The rate of dividend is not
fixed. The Board of Directors recommend the rate of dividend which is then
declared by the members at the Annual General Meeting. New issues of share
capital of a company limited by shares shall be of two kinds only, namely:- (a)
equity share capital: (i) with voting rights, or (ii) With differential rights
as to dividend, voting or otherwise in accordance with such rules and subject to
such conditions as may be prescribed and (b) Preference share capital. Prior to the Amendment to the
Companies Act in 2000, public companies were not allowed to issue equity shares
with differential rights. Thus, companies are now allowed to issue non-voting
equity shares. The holders of equity shares carrying voting rights shall have
voting rights in proportion to the paid-up equity capital of the company
[Section 87(1)]. III. Deferred Or Founders’ Shares:
A pure private company can issue
shares of a type other than those discussed above [Section 90]. Thus, it may
issue what are known as deferred shares. As deferred shares are normally held
by promoters and directors of the company, they are usually called founders’
shares. They are usually of a smaller denomination, say one rupee each.
Tags : Business Environment and Law-Share & Share Capital
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