Types of Shares

 Shares

According to the Companies Act 2013, shares represent a shareholder's interest in a company's assets, signifying their ownership stake. Public limited companies can raise funds by issuing shares, which not only provide ownership rights but also come with various benefits such as voting rights, priority in receiving dividends, a share in the company’s profits, and, in some cases, a share in losses.

A fundamental aspect common to all types of shares is the right to receive dividends, which are distributed from the company’s profits.

Types of Shares

As outlined in Section 43 of the Companies Act 2013, shares are broadly categorized into two types:

1. Equity Shares (Ordinary Shares)

Equity shares are the most common type of shares issued by public companies to raise capital. Shareholders of equity shares typically have voting rights, the ability to attend company meetings, and a claim on the company’s surplus profits.

2. Preference Shares

Preference shares offer certain special privileges, primarily concerning dividends and capital repayment. Shareholders of preference shares receive dividends before equity shareholders and have a higher priority when the company is liquidated.

These two categories of shares differ in terms of profit-sharing, voting rights, and capital settlement in case of company liquidation.

 

Types of Equity Shares

Equity shares can be classified based on two perspectives: definition-based classification and feature-based classification.

Definition-Based Types of Equity Shares

Authorized Share Capital – The maximum amount of capital a company is allowed to raise through share issuance, as specified in the Memorandum of Association (MoA).

Issued Share Capital – The portion of authorized capital that a company has actually issued as shares.

Subscribed and Paid-up Capital – The part of issued share capital that investors have subscribed to. In some cases, not all issued shares are purchased by investors.

Feature-Based Types of Equity Shares

Voting and Non-voting Shares – Voting shares allow shareholders to participate in company decisions, such as electing directors or approving policies. Non-voting shares either have limited or no voting rights. An example of differential voting rights is Tata Motors' issuance of ‘A’ shares in 2008.

Sweat Equity Shares – Companies may reward employees and directors with shares as compensation for their exceptional contributions. This helps retain valuable employees by giving them ownership in the company.

Right Shares – Issued to existing shareholders, giving them the first opportunity to purchase new shares before they are offered to external investors.

Bonus Shares – Provided to existing shareholders in place of cash dividends. Companies may also issue bonus shares by converting retained earnings into equity.

Types of Preference Shares

Preference shares are further categorized based on specific features:

Redeemable and Irredeemable Preference Shares – Redeemable preference shares allow the company or shareholder to buy back shares at a future date, whereas irredeemable preference shares do not carry this option.

Convertible and Non-convertible Preference Shares – Convertible preference shares can be converted into equity shares under certain conditions, whereas non-convertible preference shares do not offer this option.

Participating and Non-participating Preference Shares – Participating preference shareholders are entitled to a share in the company’s additional profits after dividends are distributed to equity shareholders. Non-participating preference shareholders receive only a fixed dividend.

Cumulative and Non-cumulative Preference Shares – Cumulative preference shares accumulate unpaid dividends, which are carried forward to future years if not paid in a given year. In contrast, non-cumulative preference shares do not allow dividend carryover if payments are skipped.