Share : Definition and Kinds of Share

In company law, a share represents a unit of ownership in a company. When a company’s total capital is divided into small, equal portions, each of those portions is called a share.

According to Section 2(84) of the Companies Act, 2013, a "share" means a share in the share capital of a company and includes stock. Essentially, a share certificate is a bundle of rights and obligations, such as the right to vote, the right to receive dividends, and the obligation to follow the company’s Articles of Association.

Kinds of Shares

Under Section 43 of the Companies Act, 2013, a company limited by shares can issue only two primary types of shares: Equity Shares and Preference Shares.

1. Equity Shares

Equity shares are also known as "Ordinary Shares." They represent the core ownership of the company.

• Risk and Reward: Equity shareholders are the residual claimants. They receive dividends only after all other obligations (including preference dividends) are met.

• Voting Rights: They typically carry voting rights on all resolutions, giving them control over the company's management.

• Types:

  • Equity Shares with Voting Rights: Standard shares where 1 share equals 1 vote (usually).

  • Equity Shares with Differential Rights: Shares that carry different rights regarding dividends or voting (e.g., higher dividends but no voting rights).

2. Preference Shares

Preference shares carry certain "preferential" rights over equity shares. They are a hybrid instrument, possessing features of both debt and equity.

• Preferential Dividend: They are entitled to a fixed rate of dividend, which must be paid before any dividend is paid to equity shareholders.

• Repayment Preference: If the company is wound up, they are paid back their capital before the equity shareholders.

• Voting Rights: Generally, they do not have voting rights unless their specific rights are being altered or their dividends have been in arrears for two years or more.

Sub-categories of Preference Shares

Preference shares can be further classified based on how they handle dividends and capital:

• Cumulative Preference Shares: If the company fails to pay a dividend in one year due to lack of profits, the unpaid dividend accumulates and must be paid in future years before equity shareholders get anything.

• Non-Cumulative Preference Shares: Dividends do not accumulate. If not paid in a specific year, the right to that dividend is lost.

• Participating Preference Shares: These shares get a fixed dividend and also have a right to share in "surplus profits" after equity shareholders have been paid.

• Non-Participating Preference Shares: They only receive the fixed rate of dividend and nothing more.

• Redeemable Preference Shares: These are issued for a specific period, after which the company must repay the capital to the shareholders. (Note: Under Indian law, all preference shares must be redeemable within a maximum of 20 years).

• Convertible Preference Shares: These give holders the option to convert their preference shares into equity shares after a certain period.

Key Differences at a Glance

Feature	Equity Shares	Preference Shares
Dividend Rate	Fluctuating (depends on profit).	Fixed.
Payment Priority	Paid last.	Paid before Equity shares.
Voting Rights	Full voting rights.	No voting rights (usually).
Risk	High risk, high reward.	Low risk, fixed reward.
Redemption	Not redeemable (only Buy-back).	Must be redeemed within 20 years.