Classification and Type of Shares

The share capital of a company means an amount of funds which a company can raise by the issue of shares of its company but not exceeding the maximum amount mentioned in a memorandum of the Company.

The share capital of a company limited by shares can be classified as under:

  • Equity Share capital

As defined under Companies Act “equity share capital”, in a company limited by shares, means all share capital which is not preference share capital. Equity shares carry higher risk factor if compared to preference capital but the rate of dividend paid is also higher.

  • Equity Shares can be further classified as

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and

  • Preference share capital:

As defined under the Companies Act “preference share capital”, in a company limited by shares, means such a part of share capital of the company which carries or would carry a preferential right with respect to payment of dividend which may either be fixed amount or an amount calculated at a fixed rate or which may either be free of or subject to income-tax and the repayment of share capital amount at the time of winding up of the Company prior to any other class of share capital.

Preference shares can be further classified as:

  • Cumulative Preference Shares- The preference shares which carry cumulative right to pay a dividend in the subsequent year are known as cumulative preference shares. If a company has incurred losses in the current year then the dividend for the same can be paid next year.
  • Non-Cumulative Preference Shares- The Preference shares which do not carry cumulative right and involves payment of dividend every year if possible are known as Non-cumulative preference shares.
  • Participating Preference Shares- The shareholders of such a category have the right to participate and get a share in the excess profit of the company after payment of dividend to equity shareholders.
  • Non-Participating Preference Shares- The shareholders of such a category do not have any right to participate in an excess profit of the Company except the fixed dividend to be paid on preference shares.
  • Redeemable Preference Shares-  The preference shares which can be redeemed by the Company during the lifetime of the Company are known as redeemable preference shares. Such a category of shares can be redeemed within a period of 20 years from the date of issue except for infrastructural projects which may issue preference shares for a period exceeding 20 years but not exceeding 30 years with the redemption of a minimum 10% of such preference shares per year from the 21st year onwards or earlier.
  • Irredeemable Preference Shares- The preference shares which cannot be redeemed during the lifetime of the Company are known as Irredeemable Preference Shares.
  • Convertible Preference Shares- The preference shares which can be converted into equity shares as per terms and conditions set with shares at the time of issue.
  • Non-convertible Preference Shares-Such a category of shares cannot be converted into equity shares at any point of time.

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