Share:
A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietary relationship between the company and the shareholder. A shareholder is the proportionate owner of the company.
Section 2(46) defines a share as, “A share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied”.
An exhaustive definition of share has been given by Farwell J. in Borland’s trustee v. steel bros. in the following words:
“A share is the interest of a shareholder in the company, measured by a sum of money, for the purpose of liability in the first place, and of interest the second, but also consisting of a series of mutual covenants entered into by all the shareholder inter se in accordance with the companies act”.
Thus a share
i. Measures the right of a shareholder to receive a certain proportion of the profits of the company while it is a going concern and to contribute to the assets of the company when it is being wound up; and
ii. Forms the basis of the mutual covenants contained in the articles binding the shareholders inter se.
Types of Shares:
According to section 86 of the companies act, a company can issue only two types of shares:
(a) Preference shares
(b) Equity shares
(a) Preference Shares
The term preference shares focus certain preferential rights over other types of shares. They are,
i. A preferential right to get a fixed rate of dividend during the life of the company. It means that only after payment of dividend to preference shareholders, the surplus, if any, can be used for paying dividend to equity shareholders.
ii) A preferential right to the return of share capital at the time of winding up of the company. This means that when the company goes into liquidation, after discharging debts due to outsiders, the surplus assets must first be used for returning the share capital contributed by the
preference shareholders. The remaining surplus alone will be enjoyed by equity shareholders.
Preference shareholders must carry both these preferential rights. However, preference shareholders have certain disabilities. For instance, they do not normally enjoy voting rights. However they get the right to vote.
1. on any resolution affecting their rights
2. on all resolutions when dividend has not been paid to them for certain
period as prescribed in the Act.
Kinds of Preference Shares
Preference Shares are of different types based on differing rights. They are briefly described below.
1. Cumulative Preference Shares
In case dividend is not declared, because of inadequate profit, the right to dividend for that year does not lapse in the case of cumulative preference shares. Dividends not declared and paid get accumulated so
that they may be paid out of profits of subsequent years as arrears of dividend before any dividend is paid to equity shareholders.
Preference shares are always cumulative, unless the contrary is expressly stated in the Articles of Association.
2. Non Cumulative Preference Shares
In the case of non cumulative preference shares if dividend is not paid in any particular year, it lapses. Dividend is not allowed to accumulate and such unpaid dividend will not be paid in subsequent
years even though sufficient profits are earned.
3. Participating Preference Shares
In addition to the fixed rate of dividend, these shares carry a further right to participate with the equity shareholders in the surplus profits which remain after paying a certain rate of dividend to equity shareholders. Thus they get two kinds of dividend, one fixed rate
and the other changing every year depending on the level of excess profits.
Similarly such preference shares have a right to participate in the surplus assets of the company on its winding up after paying in full the preference and equity share capital.
The right to participate in the surplus profits or surplus assets at the time of winding up is available to preference shareholders only if it is specifically expressed in the articles. In other words preference shares are presumed to be non-participating unless specifically stated otherwise in the articles.
4. Non Participating Preference Shares
These shares are entitled to only a fixed rate of dividend. They do not participate either in the surplus or in the surplus assets. In such a case, the entire surplus goes to equity shareholders.
If the articles are silent with regard to this right to participate in the surplus profit or surplus assets, the preference shares will be
considered to be only of non-participating type.
5. Convertible Preference Shares
Where preference shares entitle their shareholders to convert their preference shares into equity shares within a specified period, they are known as Convertible Preference Shares.
6. Non-Convertible Preference Shares
Where preference shares cannot be converted into equity shares, they are called non-convertible preference shares. Once issued as preference shares, they continue to be only preference shares throughout
the life time of the company without any change in their characteristics.
If the Articles are silent regarding this right to convert, the preference shares will be considered to be only Non-Convertible Preference Shares.
7. Redeemable Preference Shares
If the Articles of Association authorise, a company can issue redeemable preference shares. It means, that the capital raised by
means of these shares can be returned after a specified period or at any time at its options after giving notice as per terms of issue. These shares can be redeemed either out of profits or out of the proceeds of a
fresh issue of shares. Redeemable preference shares can be redeemed
if they are fully paid-up. A company cannot convert existing preference shares into redeemable preference shares.
8. Irredeemable Preference Shares
Any preference share that cannot be redeemed during the lifetime of the company is known as irredeemable preference Shares.
(b) Equity Shares
Equity shares are those, which are not preference shares. They were also known as ordinary shares. They are entitled to get
dividend only after the fixed rate of dividend is paid to preference shareholders. Similarly at the time of winding up of the company, only after returning preference share capital in full, and if there is any surplus,
it will be paid to equity shareholders.
The rate of dividend varies from year to year depending on the profits earned by the company. The larger the profits the higher may be the dividend for equity shareholders. In the case of reputed companies,
rate of dividend paid to equity shareholders is far higher than the fixed rate paid to preference shareholders. However, when there is no profit in any year, equity shareholders’ dividend for that year will not be paid as arrears of dividend in subsequent years even though profits may be very large
Equity shareholders are entitled to vote on all resolutions