SHARES: MEANING, TYPES AND VOTING RIGHTS ON SHARES

MEANING:

A share is an interest held by the shareholder in a company. The capital of a company is split-up into some individuals units of fixed amount known as shares. A share certificate is issued by a company under its common seal to the shareholder. It provides details about the number of shares held by a member and is also proof of the title of the member to the shares. The Memorandum of Association of a company having share capital provides the amount of share capital with which the company is to be registered and it also provides the division of the share capital into shares having a fixed amount. It is given in Section 44 of the Companies Act 2013 that the shares held by the member in a company shall be movable property, transferable according to the method given in the Articles of the company. Further, Section 45 of the Act provides that every share of a company having share capital is differentiated by a distinctive number for that share.

DEFINITION:  

Section 2(84) of the Companies Act, 2013 provides that share denotes a share in the share capital of a company including stock.

Justice Farewell has stated that a share in the interest of a shareholder in a company is calculated by a sum of money for liability and interest.

In the case of Commissioner of Income Tax v/s Standard Vacuum Oil Co. Ltd, the Court observed that a share is an interest having a money value and made up of diverse rights mentioned in the Articles of Association of a company.

In the case of S. Vishwanathan and Another v/s East India Distilleries and Sugar Factories Ltd, the Court held that a share takes with it certain rights and liabilities while the company is working or while the company is being wound up. Thus, it may be interpreted as a bundle of rights and obligations.

TYPES OF SHARES:

Section 43 of the Companies Act 2013, categorizes the share capital of a Company into two kinds:

  • Equity shares
  • Preference shares

EQUITY SHARES:

 To a company limited by shares Section 43 of the Act, defines equity shares as all share capital that is not preference share capital. Equity shares are also called ordinary shares.

As per Section 43 of the Act, equity shares are either with voting rights or with differential rights to voting, dividends, or as per such rules as may be prescribed. Thus, companies can issue different classes of equity shares with different rights as to dividends or voting.

Equity shares consist of a big portion of the share of a company that has a share capital. Equity shareholders are paid as per the earnings of the company and they do not get a fixed dividend. The holders of the equity shares are the members of the company and can vote on all major business decisions of the company. Equity share-holders also choose the company’s management.

Although equity shareholders have a right to claim dividends on the surplus profits of the company, the dividend is paid to them after paying off all the liabilities. When the company is winding up, the equity shares are repaid in the end. The rate of dividends in the case of equity shares is always fluctuating. Equity shares cannot be converted into preference shares and they do not gather or collect the previous year’s dividend. Equity share-holders face a higher risk.

KINDS OF EQUITY SHARES:

  • Sweat Equity ShareSweat Equity Shares denotes equity shares issued by the company to its directors and or employees at a discount or for something other than cash on behalf of services rendered, the intellectual property provided, or other value additions.
  • Authorized Share CapitalThe maximum amount of capital that a company can issue is known as the Authorized share capital. Companies can increase the limit to authorize shares after fulfilling certain formalities and paying fees to the legal authority.
  • Issued Share CapitalShares offered by the company to its investors are known as Issued share capital.
  • Subscribed Share CapitalIt consists of the part of issued share capital consented and accepted by the investors.
  • Paid-up CapitalIt is the part of subscribed capital used by the company to invest in its business.
  • Rights ShareThe shares issued to individuals after investing in equity shares are called the right shares. They are issued for protecting the existing investor’s ownership.
  • Bonus Share- Shares that are issued by the company to its shareholders in the shape of dividends are known as Bonus shares.

PREFERENCE SHARES:     

    Section 43 of the Companies Act states that the Preference share capital is that part of the Issued share capital of the company carrying with it a preferential right for:

Dividend – A fixed amount or amount measured at a fixed rate that might/might not be subject to income tax.

Repayment – While winding up or repayment of the amount of paid-up share capital, there exists a preferential right to the payment of any fixed premium or premium on any fixed scale that is identified by the Memorandum or Articles of the company.

 Preference shares are given preference while making payment of dividend and repayment of capital. If a company winds up then the payment of liabilities of the holders of preference shares is done first. In the case of the preference shares, the rate of dividend is fixed and is paid before the equity shareholders. Preference shares can be converted into equity shares. Holders of preference shares are the lender of the share capital of the company and not the owner of it. Preference shareholders are those investors willing to invest in the company but are not ready to take the risk of fluctuating share price, so they prefer preference shares by which they can earn a fixed rate of dividend.

KINDS OF PREFERENCE SHARES:

  • Cumulative preference shares– In these type of shares dividend keeps accumulating till it is fully paid up. The arrears of any year’s dividend keep forwarding as a charge upon the next years’ profits. Thus, a cumulative preference shareholder can claim a fixed dividend of the current year out of the future profits. Thus, the dividend keeps accumulating till is paid to the shareholder. The accumulated arrears of dividends have to be paid before paying anything out of the profits to the holders of any other class of shares.
  • Non-cumulative preference shares- In these types of shares, the dividend does not go on accumulating. These types of shares get no dividend or get a partial dividend if there are no profits or inadequate profits in any year. They don’t have the right to claim arrears of dividends of any year or years out of the profits of the subsequent years.
  • Participating preference shares– The holders of these shares not only have a right to a fixed rate of dividend but also to a share in the surplus profits which is remaining after the claims of equity shareholders are sort out.
  • Non-participating preference shares– The holders of these shares have a right to a fixed rate of dividend. However, they are not given a share of the surplus profits.
  • Convertible preference shares These shares give a right to their holder to convert them into equity shares within some time.
  • Non-convertible preference shares– These shares do not entitle their holder a right to convert these shares into equity shares. Thus, these shares cannot be converted.
  • Redeemable preference shares– Redeemable preference shares can be redeemed after some time or after giving notice at any time at the will of the company out of the company’s profits or sale proceeds of the new shares.
  • Irredeemable Preference Shares: Irredeemable preference shares are permanent and therefore cannot be redeemed during the lifetime of the company.

VOTING RIGHTS ON SHARES (Section 47):

Voting rights given on Equity shares-: Every member holding equity share capital in a company that is limited by shares has a right to vote on every resolution put before the company. The voting right of a member on a poll shall be in proportion to his share in the paid-up equity share held by him out of the total share capital of the company. An equity shareholder’s right to vote as a member of the company can be revoked if that member fails to make payment of calls or other sums due against him or where the company has used its right of lien on his shares.

 Voting rights on preference shares: Preference share-holders have the right to vote on the following matters-

  • Resolutions directly affecting the rights that are attached to the preference shares;
  • Resolution relating to winding up the company;
  • Resolution relating to reduction or repayment of the company’s equity or preference share capital.

      However, where dividends to a class of preference share not been paid for two years or more, such class of preference shareholders get a right to vote on all the resolutions placed before the company.

      The voting rights of the preference shareholders shall be proportionate to the share in paid-up preference share capital of the company. The proportion of the voting rights of equity shareholders in comparison to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital relating to the equity shares bears to the paid-up capital relating to the preference shares.

CONCLUSION:

From the above discussion, we can conclude that a share is the smallest unit of ownership interest held by a member of a company’s total net worth. Two main types of shares are equity shares and preference shares. Equity shares are crucial for raising funds for a company signifying ownership in the company. Whereas preference shares are the shares having preference in getting dividend and repayment of capital.

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