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Saturday, January 07, 2012

Difference between Equity Shares and Preference Shares

Equity Share: According to Indian Companies Act 1956 " an equity share is share which is not preference share". An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.
Preference Share: A share that carries the following two preferential rights is called ‘Preference Share’:
(i) Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity Shares.      
(ii) Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned in case the company is going to wind up.
                        

Difference between Preference Share and Equity Share are given below:
Basis of Difference
Preference Share
Equity Share
a)Right of Dividend
Preference shares are paid dividend before the Equity shares.
Equity shares are paid dividend out of the balance of profit available after the dividend paid to preference shareholders.
b)           Rate of Dividend
Rate of dividend is fixed.
Rate of dividend is decided by the Board of Directors, year to year depending on profits.
c) Convertibility
Preference Shares may be converted into Equity shares, if the terms of issue provide so.
Equity shares are not convertible.
d)           Participation in Management
Preference shareholders do not have the right to participate in the management of the company.
Equity shareholders have the right to participate in the management of the company.
e)           Voting Right
Preference shareholders do not carry the voting right. They can vote only in special circumstances.
Equity shareholders have voting rights in all circumstances.
f)Redemption of Share Capital
Preference shares may be redeemed.
A company may buy-back its equity shares.
g)Refund of Capital
At the time of winding up of the company, preference share capital is paid before the payment of Equity share capital.
On winding up, Equity Share capital is repaid after preference share capital is paid.