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Shares : Meaning, Nature and Types

Last Updated : 12 Mar, 2024
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What are Shares?

When the total capital of the company is divided into units of small denominations, it is known as shares. For example, if the total capital of the company is ₹ 5,00,000, divided into 10,000 units of ₹50 each, each unit of ₹50 will be called a share (of ₹ 10 each). Thus, in the above case, the company has 1,00,000 shares of ₹10 each. In order to identify the shares, they must be numbered.

According to the Companies Act, 2013, “Share” means a share in the share capital of a company including stocks. Shares are considered as a type of security.”

Nature of Shares

As per the Articles of Association of the Company, the shares of a company are movable property and transferable. They are covered under the Sales of Goods Act, 1930, and are treated as goods. Shares can be bought, sold, hypothecated and bequeathed.

Types of Shares

A company may issue two types of Shares under Section 43 of the Companies Act, 2013. They are:

  1. Preference Shares
  2. Equity Shares

1. Preference Shares

Preference shares have the following two rights:

  1. They are liable to receive the dividend at a fixed rate before any dividend is paid on the equity shares. 
  2. At the time of winding up the company, they have the right to the return of capital before that of equity shares.

They also have the right to participate in excess profits when a specified dividend has been paid on the equity shares or the right to receive premium at the time of redemption.

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:

  1. 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’.
  2. 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:

  1. 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.
  2. 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:

  1. Convertible Preference Shares: The shares which can be converted into equity shares as per the terms of issue, are known as Convertible Preference Shares.
  2. 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:

  1. 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.
  2. 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.

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