As per section 43 of the Companies Act, a company can issue 2 types of shares.

1. Equity Shares

The real owners of the company hold the Equity Shares, also known as ordinary shares. Further, they have voting right in the company and control over the working of the company. The Company pays dividends to the equity shareholders after paying it to the preference shareholders.

The rate of dividends depends upon the profits of the company. The company may pay them a higher dividend or nothing at all. Hence, they are at greater risk than preference shareholders.

2. Preferential Shares

Preferential Shares carry two rights:

(i) The Right of Preferential Treatment i.e. payment of the fixed amount of dividends at a fixed rate before the company pays any dividend to the equity shareholders.

(ii) The company has an obligation to pay the preferential shareholders before making any payments to the equity shareholders.

Types of preferential shares:

1. Cumulative and Non-Cumulative Preferential 

If there are no profits in a year and the arrears of the dividends are to be carried forward, the cumulative shareholders have the right to the missed dividends while the non-cumulative shareholders do not have any such right.

2. Participating and Non-Participating Preferential 

The Memorandum of Association of a company entitles the Participating shareholders to receive a share of any remaining liquidation proceeds on an as-converted to the common stock basis after they have already gotten back their liquidation preference; whereas non-participating shareholders either get their liquidation preference back or the amount they would have gotten had they converted to common stock.

3. Non-Convertible and Convertible Preferential 

Convertible Preference shareholders can convert their shares into equity shares whereas Non-Convertible Preferential Shareholders do not have any such rights.

Convertible Preference shareholders give up their rights as a preferred shareholder i.e. no fixed dividend or higher claim on assets and become a common shareholder i.e. ability to vote and participate in share price declines and rises.

4. Redeemable and Irredeemable Preferential shares

The issuing company can buy back Redeemable preference shares within its predetermined maturity period. However, Irredeemable preference shares are which the issuing company cannot buy back till the company is a going concern and in existence.


What is Stock?

A company can bundle fully paid up shares together for convenience. Further, it may divide Stock into any amount and retransfer into any fraction and sub-divisions without having any regard to the face value of the shares.


Article by:
Abhishek Khare, Advocate

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