Share, as defined in the Companies Act 2013, is the measure of a shareholder’s interest in a company’s assets. In other words, shares represent a shareholder’s stake of ownership of a company.
Public limited companies can raise capital for their business by issuing stocks. Apart from possessing ownership rights, these shares also carry an array of other entitlements. Some types of shares confer voting rights, the right to dividends on priority, the company’s surplus profits, share in the company’s losses, etc.
A common feature in all variants of shares is the right to dividends, which a company pays out of the profit.
As per Section 43 of the Companies Act 2013, shares can be broadly classified into two types –
Ordinary or equity share is the commonest variant of stock that a public company issues to raise capital. Typically, holders of ordinary shares enjoy voting rights, can attend general and annual meetings of a company, and are also entitled to a company’s surplus profits.
Preference shares carry special rights or preferential treatments, especially in regard to dividend receipt and capital reimbursement when an organisation is winding up.
In other words, preference shareholders receive dividends on the highest priority and also companies return their capital before ordinary shareholders when undergoing liquidation.
Both these types of shares vary in regards to share in profitability, voting rights, as well as settlement of capital when a company is winding up or is being liquidated.
When it comes to types of shares, ordinary shares involve classification based on two understandings. One is definition-based, and the other is feature-based.
The definition-based types of equity shares are –
It denotes the total amount of capital that a company can raise by issuing stocks, as mentioned in the Memorandum of Association (MoA).
As the name suggests, issued share capital refers to the amount of capital a company raises by means of issuing stocks.
It refers to a percentage of issued capital to which investors have subscribed. It can happen that investors do not purchase all the shares that a company issues.
Feature-based types of equity shares are –
As the name suggests, entities holding these voting shares are entitled to cast their vote in matters concerning a company’s policies or election of directors. Typically most ordinary shares are voting shares.
In the case of non-voting shares, it might entail differential voting rights or none at all. An example of differential voting rights is mentioned above, where Tata Motors issued ‘A’ shares in 2008.
Companies can issue shares to their employees and directors as a means of compensation, usually when they perform excellently. By means of sweat equity shares, companies retain efficient employees by giving them a stake in the ownership.
Among the many types of stocks, a company issues this variant to its existing shareholders. In a stricter sense, companies proffer existing stakeholders the right to purchase such shares before it is open for trade to external investors.
Companies issue bonus shares in lieu of monetary compensation for dividends. Therefore, existing shareholders are only entitled to bonus shares. Organisations can also issue bonus shares to convert a portion of retained earnings into equity shares.
The different types of shares under preference shares are –
In the case of redeemable types of shares, the issuing company and such shareholders agree that the company can redeem or buy-back those shares at a later period, either after the expiration of a certain time or on a future date.
Redeemable shares vary based on who can exercise the buy-back provision – the shareholder or the organisation. An irredeemable share is, therefore, the exact opposite of a redeemable stock.
Another way types of shares can be categorised based on whether they carry the provision of conversion or not. To that effect, holders of convertible preference stocks can convert their holdings to equity shares upon meeting specific conditions.
Conversely, holders of non-convertible preference shares are not entitled to that provision.
Holders of participating preference shares have the right to partake in a company’s profits once a company allots dividends to ordinary shareholders.
Therefore, when a company’s net income is substantially high, such shareholders stand to receive a part of such profits. On the other hand, holders of non-participating shares are only entitled to a fixed dividend payment. The latter is a commoner variant.
If a company does not provide dividends for preference shares in a particular year, such dividend entitlement is carried forward to the following year if it is a cumulative stock.
Conversely, in the case of non-cumulative preference shares, the dividend amount is not carried forward if an organisation does not pay dividends in a specific year.