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Business Environment and Law-Share & Share Capital

Classes Of Shares:-Share & Share Capital

   Posted On :  14.05.2018 08:49 pm

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.


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 years

II. 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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