Define Share and Types of Shares

Definition of Share

The companies act defines a share as “share in the share capital of a company, and includes stock except where a distinction between stock and share is expressed or implied.“[sec.2(42)].

According to J. Farwell___” 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 in the second.

Thus, “A share is a not a sum of money, But is an interest measured in a sum of money,and made up of various rights,contained in the contract,including the right to a sum of money of a more or less amount.

Nature of Share

Shares,in India,are both goods as well as choice-in-action. It is a bundle of contractual rights,each one of which is legal choice-in-action. The legal title to the shares is vested in the person entitled to it either by allotment by the company or by transfer from a former holder.

According to Section 82 of the companies Act,shares or other interest of any member in a company are movable property,transferable in the manner provided by the articles of the company.

Kinds Of Share

A company can issue two types of Shares:1. Preference shares 2. Equity Shares.

Share types

1.Preference Shares [Section 85]:

Preference shares means shares which carry the following two preferential rights over other classes of shares:

  1. Preferential right in respect of a fixed dividend. It may consist of a fixed amount (say Rs.30,000 per annum or a fixed rate).
  2. Preferential right as to the payment of capital in the case of winding up of company in priority to other classes of shares.

Features of Preference Shares

  • Accumulation of dividends: Preference shares are generally cumulative in nature. The dividends amount keeps on accumulating over a period of time as decided by the company and the entire amount so accumulated is paid at a later date.
  • Call option for the company: For the issuing company, it is possible to call the preference shares at a certain price. This is possible when the terms and conditions of issued preference shares include a clause empowering the issuing company the right to ‘call’ the preference shares.
  • Convertibility: Preference shares are given the choice of converting their preference shareholdings into equity shareholders. Such conversions are allowed by a company for a stipulated period and ratio.
  • Redeemability: Unlike equity shares, which are perpetual in nature and not redeemable,preference shares are generally redeemable. However, there is no restriction as such and a company may also issued perpetual preference shares. As the term itself suggests, a perpetual preference shares has no maturity period, whereas a redeemable preference shares has a maturity period, after which the investors are paid their money back.

Types of preference shares

(i). Cumulative and non-cumulative preference shares

In case of cumulative preference shares the dividend goes on accumulating till it is paid.The cumulated arrears of dividend shall be cleared before any dividend is paid on equity shares. In case of non-cumulative preference shares the right to dividend is lost for a particular year if no dividend is declared by the company for that year.Preference shares are always taken as cumulative unless otherwise specified.

(ii). 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 through sufficient profits are earned.

(ii). Redeemable and Irredeemable Preference Shares

Redeemable preference shares are redeemable during the life time of the company while irredeemable preference shares are to be redeemed only in the event of company  winding up.However,as per the companies act 1996 a company can issue only such preference shares which are redeemable within 20 years from the date of issue.In other words,now a company cannot issue irredeemable preference shares.

(iii). Participating and non-participating shares

Participating preference shares besides getting a fixed rate of dividend also get a share in the surplus profits of the company,if any,paid on equity shares at a fixed rate.While non participating preference shares only get a fixed rate of dividend.They do not share surplus profits with equity shareholders of the company.

(iv). Convertible and Non-convertible preference shares

Convertible preference shares have the right to get themselves converted into equity shares as per the agreed terms while non-convertible preference shares have no such right. It may be noted that preference shares are always taken as non-cumulative,non-participating and non-convertible unless otherwise agreed.

2. Equity Shares [Section 85(2) and 86]:

Equity shares are those shares which are not preference shares.After the enactment of companies act 2000 equity shares can be of two types:

    1. With voting right;
    2. With differential right as to dividends,voting or otherwise in accordance with the rules and subject to such conditions as may be prescribed.

Features of Equity Shares

  • Owned capital: Equity share capital is the money of the investors, i.e., shareholders. As such, Equity share capital is owned capital, and shareholders are the true owners of the company.
  • Fixed or nominal Value: Every share price of a company is expressed as Rs/-10, which is fixed or a nominal value.
  • Distinctive number: For the purpose of identification, each share is allotted a serially running unique number.
  • Attached rights: By virtue of holding shares of a company, the shareholder has certain rights, like:
  1. Right to attend meetings,
  2. Right ti vote,
  3. Right to receive dividend,
  4. Right to inspect the company’s books of accounts, etc.