Kinds of share capital
📚 Law Minded summary
A company limited by shares can issue two kinds of share capital: equity and preference.
Equity shares carry voting rights, or come with differential rights as to dividend or voting. Preference shares get their dividend first and rank ahead of equity if the company is wound up, but normally carry no vote on general matters.
A One Person Company and a private company can be exempted from this split by their own articles.
The share capital of a company limited by shares shall be of two kinds, namely:— (a) equity share capital—
(i) with voting rights; or (ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and (b) preference share capital: Provided that nothing contained in this Act shall affect the rights of the preference sha re holders who are entitled to participate in the proceeds of winding up before the commencement of this Act. Explanation.—For the purposes of this section,—
(i) “equity share capital”, with reference to any company limited by shares, means all share capital which is not preference share capital;
(ii) “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—
(a) 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 (b) 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;
(iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:—
(a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whethe r fully or to a limited extent, with capital not entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub -clause (b) of clause ( ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.