According to the section 2(46) of the Company’s Act 1956, share means a part in the share capital of the company and it also includes stock except where a distinction between stock and share capital is made expressed or implied.
In general, a share is a proportional ownseship in an entity or firm. It is mainly used in terms of an artificail person like companies and Trusts.
It is also termed as 'STOCKS'.The stock of a business is divided into small money units in the form of shares. A share has a certain declared face value, commonly known as the par value of a share.The par value is the minimum amount of money that a business may issue and sell shares in a group or to the public at large. The total no of shares (units) issues multiplied by the Face value of the shares is termed as the SHARE CAPITAL of the company. A business may issue different types (classes) of shares, each having distinctive ownership rules, privileges, or share values.
Ownership of shares is documented by issuance of a stock certificate (or) Share Certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares.
Face value of the shares:
In context to issue of shares in the Indian capital markets, companies generally classify shares into the following denominations:
Rs: 100
Rs: 10
Rs: 5
Rs: 2
Rs: 1
Types of shares:
Equity shares: The holders of these shares are the real owners of the company.According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the share, which is not preference shares. In other words equity shares are those shares, which do not have the following preferential rights:
-Preference of dividend over others.
-Preference for repayment of capital over others at the time of winding up of the company.
These shares are also known as ‘Risk Capital or ordinary shares’ because they get dividend on the balance of profit. These shares do not enjoy any preference regarding payment of dividend and repayment of capital during the winding up of the company. They are given dividend after all the expenses of the company are met. Holders of these shares enjoy voting rights in the decisions made by the company/ the board of directors on behalf of the company. They have to claim dividend only, if the company in its A. G. M. declares the dividend. The rate of dividend on such shares is not pre-determined,they are given dividend after all the expenses of the company are met.The dividend on equity shares depends on the profits made by a company. Higher the profits, higher will be the dividend, where as lower the profits, lower will be the dividend. The equity shareholders have the right to vote on each and every resolution placed before the company.
Preferred shares: These shares are those shares which are held by the founders or beginners of the company. They are also called as Founder shares or Management shares.
In deferred shares, the right to share profits of the company is deferred, i.e. postponed till all the other shareholders receive their normal dividends. These shareholders are the last claimants of the profits, they have a considerable element of speculation or uncertainty and they have to bear the greatest risk of loss. The market price of such shares shows a very wide fluctuation on account of wide dividend fluctuations.
Deferred shares are not transferable if issued by a private company. Deferred shareholders do not enjoy the right of priority to have shares offered in case of the issue of shares by the company. If the company goes into liquidation the deferred shareholders can get refund of capital only after the rights of preference and equity shareholders have been satisfied.
Bonus shares: Bonus shares are those shares which are issued by the company free of charge as bonus to the shareholders. They are issued to the existing shareholders in proportion to their existing share held by them. These shares are issued to the shareholders, when the company wants to distribute its accumulated profits and reserves over years of successful operation. These kind of shares are a hybrid variety where the existing equity shareholders are rewarded by more no of shares. It is a kind of gift to the shareholders from the company. It is bonus in the form of shares instead of cash. These shares have all types of preferences which are available to the existing shares.
For example. two bonus shares for five equity shares. The issue of bonus shares is also termed as capitalization of undistributed profits.
Preference shares: According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the following two preferential rights:
1. The payment of dividend at fixed rate before paying dividend to equity shareholders.
2. The return of capital at the time of winding up of the company, before the payment to the equity shareholder.
Both the rights must exist to make any share a preference share and should be clearly mentioned in the Articles of Association.
Preference shareholders do not have any voting rights, but in the following conditions they can enjoy the voting rights:
(1) In case of cumulative preference shares, if dividend is outstanding for more than two years.
(2) In case of non-cumulative preference shares, if dividend is outstanding for more than three years.
(3) On any resolution of winding up.
(4) On any resolution of capital reduction.
These shares are those shares which are given preference as regards to payment of dividend and repayment of capital. They do not enjoy normal voting rights. Preference shareholders have some preference over the equity shareholders in context to the payment of the dividends and in the case of winding up of the company, they are paid their capital first. Most of the time the Preference shareholders also get interest on the capital invested in the company. They can vote only on the matters affecting their own interest. These shares are best suited to investors who want to have security of fixed rate of dividend and refund of capital in case of winding up of the company.
Types of preference shares:
In addition to the aforesaid two rights, a preference shares may carry some other rights. On the basis of additional rights, preference shares can be classified as follows:
• Cumulative Preference Shares: Cumulative preference shares are those shares on which the amount of divided if not paid in any year, due to loss or inadequate profits, then such unpaid divided will accumulate and will be paid in the subsequent years before any divided is paid to the equity share holders. Preference shares are always deemed to be cumulative unless any express provision is mentioned in the Articles.
• Non-Cumulative Preference Shares: Non-cumulative preference shares are those shares on which arrear of dividend do not accumulate. Therefore if divided is not paid on these shares in any year, the right receive the dividend lapses and as such, the arrear of divided is not paid out of the profits of the subsequent years.
• Participating Preference Shares: Participation preference shares are those shares, which, in addition to the basic preferential rights, also carry one or more of the following rights:
(a) To receive dividend, out of surplus profit left after paying the dividend to equity shareholders.
(b) To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company.
• Non-Participating Preference Shares: Preference shares are always deemed to be non-participating, if the Article of the company is silent. Non-participation preference shares are those shares, which do not have the right to receive dividend, out of surplus profit left after paying the dividend to equity shareholders and to have share in surplus assets, which remains after the entire capital has been paid on winding up of the company.
• Convertible Preference Shares: Convertible preference shares are those shares, which can be converted into equity shares on or after the specified date according to terms mentioned in the prospectus.
• Non-Convertible Preference Shares: Non-convertible preference shares, which cannot be converted into equity shares. Preference shares are always being to be non-convertible, if the Article of the company is silent.
• Redeemable Preference Shares: Redeemable preference shares are those shares which can be redeemed by the company on or after the certain date after giving the prescribed notice. These shares are redeemed in accordance with the terms and sec. 80 of the Company’s Act 1956.
• Irredeemable Preference Shares: Irredeemable preference shares are those shares, which cannot be redeemed by the company during its life time, in other words it can be said that these shares can only be redeemed by the company at the time of winding up. But according to the sec. 80 (5A) of the Company’s (Amendment) Act 1988 no company can issue irredeemable preference shares.
