Introduction
The Companies Act 2013 describes equity share capital, with reference to any company limited by shares, as all the share capital which is not preference share capital. Whereas, the definition of the term “preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to-
- payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
- repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;
What is the use of equity shares?
Issuing equity shares is a way that helps investors of the company to gain ownership of the company thereby benefiting from the profits and share market’s upward movement of the share. Also, investing in equity shares provides you with various benefits like higher returns, limited liability, protection by SEBI and many more.
What are preference shares used for?
Preference shares are useful as they provide the shareholders with the special rights to claim dividends during the company lifetime and also with the option to claim repayment of capital, in case of winding up of the company.
Distinguish between equity shares and preference shares
| Nature of Difference | Equity Share Capital | Preference Share Capital |
| Dividend | The rate of dividend on equity shares depends upon the amount of profit available and the funds requirements of the company for future expansion etc. Payment of dividend to equity shareholders is not compulsory. | preference shares are entitled to a fixed rate of dividend. |
| Preference in Dividend | the dividend on equity shares is paid only after the preference dividend has been paid. | dividend on the preference shares is paid in preference to the equity shares. |
| Preference in Winding Up | in case of winding up, equity shareholder get payment of capital after the payment of capital to preference shareholders. | in case of winding up, preferential shareholder get preference over equity shareholders with regard to the payment of capital. |
| Cumulativeness | the dividend on equity is not cumulative. | dividend on preference share may be cumulative. |
| Voting rights | an equity shareholder can vote on all matters affecting the company. | the voting rights of preference shareholders are restricted. A preference shareholder can vote only when his special rights as a preference shareholder are being varied, or any resolution for the winding up of the company or the repayment or reduction of its equity or preference share capital or if their dividend has not been paid for a period of 2 years or more. |
| Bonus and right shares | a company may issue rights shares or bonus shares to the company’s existing equity shareholders. | no bonus shares/right shares are issued to preference shareholders. |
| Redemption | equity shares cannot be redeemed except under a scheme involving the reduction of capital or buyback of its own shares. | preference shares are liable to be redeemed within a period of 20 years from the date of issue. |
Types of Equity Shares
- Authorized Share Capital
- Subscribed Share Capital
- Issued Share Capital
- Paid up Share Capital
- Bonus Shares
- Rights Shares
- Sweat Equity Shares
Types of Preference Shares
- Cumulative preference shares
- Non-cumulative preference shares
- Redeemable preference shares
- Non-redeemable preference shares
- Convertible preference shares
- Participating preference shares
- Non-participating shares
What is the role of equity and preference shareholders?
Equity shareholders being the supreme shareholders have the right to take part in the management of the company. While, preference shareholders cannot take part in the management of the company.
Which is more risky equity or preference shares?
If we talk about the risk involved then in that case, preference shares contain low risk as compared to equity shares as they are safer than equity shares which displays threat.
Final Words
Be cautious while investing your funds in equity or preference shares. It is very important to gain a good knowledge of it and then only make the right decision. A better way out is to opt for a good Consultant who may guide you with which share you should go for.
Do not hurry and go for consulting the best expert!
