Sunday, May 11, 2014

Shares: Equity Shares and Preference Shares

Shares:According to section 2(46) of the companies Act, 1956, “A share is a share in the capital of a company, and includes stock except where a distinction between stock and share is expressed or implied”.
The Supreme Court of India in the Commissioner of Income-tax V. Standard Vacuum Oil. Co. observed “By a share in a company is meant not any sum of money by an interest measured by a sum of money and made up of diverse rights conferred on its holders by the Articles of Association of the company which constitute a contract between him and the company.”
In another case Supreme Court defined a share as “a right to participate in the profits made by the company, while it is a going concern and declares a dividend, and in the assets of the company when it is wound up.”

Section 86 provides two kinds of share capital
1.       Preference share capital
2.       Equity share capital

Preference Share Capital: According to section 85 of the companies Act, 1956, preference share capital means that part of the share capital 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.

Preference shares may be classified according to the rights attached to them as follows:
a)      Cumulative and Non-cumulative Preference shares
Cumulative preference shares enjoy the right to receive the dividend in arrears for the years in which company earned no profits or insufficient profits, in the year in which company earns profits.
In case of non-cumulative preference shares dividend does not accumulate and therefore, no arrears of dividend will be paid in the year of profits. If company does not have any profits in a year, no dividend will be paid to non-cumulative preference shareholders.

b)      Redeemable and Irredeemable Preference Shares
Redeemable Preference shares are preference shares which have to be repaid by the company after the term of which for which the preference shares have been issued.
Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company.

c)       Convertible and Non-convertible preference shares
Where the preference shareholders are given a right to covert their holding into ordinary shares, within a specified period of time, such shares as known as convertible preference shares.
The holders of non-convertible preference shares have no such right of conversion.

d)      Participating and Non-participating Preference Shares
The holders of participating preference shares have a right to participate in the surplus profits of the company remained after paying dividend to the ordinary shareholders and preference shareholders at a fixed rate.
The preference shares which do not have such right to participate in surplus profits, are known as non-participating preference shares.

Equity shares [section 85(2)]
The equity shares are those shares which are not preference shares. In other words, shares which do not enjoy any preferential right in the matter of payment of dividend or repayment of capital are known as equity shares. After satisfying the rights of preference shares, the equity shares shall be entitled to shares in the remaining amount of distributable net profits of the company. The dividend on equity shares is not fixed and may vary from year to year depending upon the amount of profits available. The rate of dividend is recommended by the Board of directors of the company and declared by shareholders in the annual general meeting.
                  Equity shareholders have a right to vote on every resolution placed in the meeting and the voting rights shall be in proportion to the paid-up equity capital. As compared to this, the holders of preference shares can vote only on such resolution which directly affects the rights attached to the preference shares. However, if the preference dividend is not paid fully for more than two years, the preference shareholders shall also get voting right on every resolution placed before the company [section 87].

Difference between Preference Share and Equity Share are given below:
Basis of Difference
Preference Share
Equity Share
1.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.
2. Rate of Dividend
Rate of dividend is fixed.
Rate of dividend is decided by the Board of Directors, year to year depending on profits.
3. Convertibility
Preference Shares may be converted into Equity shares, if the terms of issue provide so.
Equity shares are not convertible.
4. 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.
5. 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.
6. Redemption of Share Capital
Preference shares may be redeemed.
A company may buy-back its equity shares.
7. 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.