Company issue of shares: types of shares (section 43)

 Types of shares (section 43 of Companies Act 2013)

Hey guys,

Welcome back!!!!!!

Have you read our previous blogs on shares?  Yes….?? Then, Congrats!!! You have understood about shares and types of share capital in the company which will help you to build your understanding into companies.

So, today I have decided to talk to you about types of shares which are covered under section 43 of the companies act 2013.   

 This article will help you to secure good marks in your accountancy exam as well as will provide you quality information about shares. 

 So listen carefully….

 There are two types of shares:

1. Preference shares

2. Equity shares

Preference shares:  preference shares are the shares which carry the following two preferential rights:

Number one: Preferential right to receive dividend (dividend on these shares may be fixed as amount or can be calculated at fixed rate.)

Number two: Return of capital on the winding up of the company before that of equity shares.

Holders of preference shares are called Preference Shareholders. And they do not have a right to participate in management of company and to vote in meetings of the company.

Equity shares: Equity shares are those shares which are not preference shares. Holders of Equity shares are called Equity shareholders.

They have a right to participate in the management of the company or to vote in meetings of the company. The dividend on these shares is decided by the board of directors every year and then approved by the shareholders. 

Equity shareholders have to take risk for getting their return from the company. If company is making losses constantly then they can lose their capital or if there are profits in the company then they will create their wealth with the company.

Your question: What are the classes of preference shares?

Me: We can classify preference shares as follows:

1) on the basis of dividend

2) on the basis of convertibility

3) on the basis of redemption

4) on the basis of participation in profits

 OK... Now I am explaining each of the above classification one by one so listen carefully.

A. On the basis of dividend: If there are profits in the company then preference shares will receive their dividend before equity shareholders.

There are two types of preference shares.

a) Cumulative Preference Shares: If there is loss in any year then for that particular year preference share will not get dividend. However if company earns adequate profits in coming years then cumulative preference shares will receive dividend for current year as well as for previous year in which company has incurred losses.

Understood…..? Say yes…. great!!!! Ok… I am now explaining in a formal language, these are those preference shares which carry the right to receive arrears of dividend before dividend is paid to the equity shareholders.

b) Non-cumulative preference shares:  These are those shares which do not carry the right to receive arrears of dividend. It means in any year, if company incurs losses then these preference shares will not receive dividend for that year.

B. On the basis of convertibility:

a) Convertible preference shares: these are those preference shares which have a right to be converted into equity shares. Means these can be converted into equity shares.

b) Non-convertible preference shares: these are those preference shares which do not have a right to be converted into equity shares.

C. On the basis of redemption:

a) Redeemable preference shares : these are those shares which is to be redeemed by the company at the time specified for redemption or up to 20 years from the date of issue , whichever is earlier. Means company will specify the date of redemption or if not, then these shares will be redeemed under 20 years of issue.

b) Irredeemable preference shares: these are those shares which are to be redeemed on the time of windup of the company. However companies act 2013 does not permit issue of these shares.

D. On the basis of participation in profits:

a) Participating preference shares: if there are profits in the company, then dividend will be calculated and will be paid firstly to preference shareholders and then to equity shareholders. But when it is decided that preference shares will also have a right to participate in remaining profits of the company which is left after payment made to equity shareholder, then these shares will be called as Participating preference shares.

b) Non-participating preference shares: if preference shares do not carry the right to participate into remaining profits which is left after payment of dividend to equity shareholders, then it will be called as Non-participating preference shares.

Ok…. guys I am sure you have understood the topic very clearly. So go and subscribe to us and share this articles to your friends or classmates.

If you have any query regarding this topic then go and ask to me on shivamsir009@gmail.com or on comment section given below.

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Thank you

Shivam garg

Team Go commerce

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