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.
|
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