Topics Covered in this article
Section 2(28) of the Companies Act, 2013 provides the definition of shares as a share in the company’s share capital and includes stock except where a distinction between stock and share is expressed or implied. In CIT v. Standard Vacuum Oil Co., the court stated that “by a share in a company is meant not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred on its holders by the articles of the company which constitute a contract between him and the company.”
In Bucha F. Guzdar v. Commissioner of Income tax, Bombay, it was held that “a share carries with it certain rights and liabilities while the co. is a going concern or while the company is being wound up.”
A share is regarded as goods under Section 2(7) of the Sale of Goods Act, 1930. It is not a negotiable instrument. As per Section 44 of the Companies Act, 2013, a share is a moveable property that is transferable as per the Articles of Association. On the other hand, a share certificate, as given under Section 46 of the Companies Act, 2013 is the prima facie evidence of the title of member to the property.
This paper defines and differentiates between the various kinds of shares, as well as the accompanying provisions. It also provides the various case-laws on the topic.
Distinction between Stock and Shares
In the layman terms, stock and shares are often used interchangeably. It is however pertinent to note that there are differences between the two terms. These are as follows-
|1.||It has a nominal value.||It does not have a nominal value.|
|2.||It has a distinctive number.||It does not bear a distinctive number.|
|3.||Originally shares can be issued.||Stock cannot be issued originally.|
|4.||Shares can be fully paid-up or partly paid up.||Stock cannot be partly paid up, it is only fully paid up.|
|5.||It cannot be transferred in fractions||It may be transferred in any fraction.|
|6.||All shares in a particular class are of equal denominations.||Stocks may be of different denominations.|
Furthermore, fully-paid up shares can be converted into stock as per Section 61 of the Companies Act, 2013.
Types of shares
There are various kinds of shares that may be issued by a company. They are given in Section 43 of the Companies Act, 2013 as hereunder-
- Preference shares
- Equity shares – with voting rights and with differential rights as to dividend, voting or otherwise -governed by Companies (Share Capital and Debentures) Rules, 2014
- GDRs- given in Section 41 of the Companies Act, 2013
- Deferred shares- they existed before the Companies Act, 1956
Preference shares are those shares where the individual will be given a preference over other shareholders in terms of-
- During life of a co. preferential dividend must be given; it may consist of fixed amount payable to preference shareholders before anything else is paid to the equity shareholders/ amount payable as dividend may be calculated at fixed rate of nominal value of each share
- On winding up of co. they must have preferential right to be paid (amount paid up must be paid back)
Preference shares do not give voting rights, as in the case of equity shares. The voting rights in case of preference shares is only limited to those cases where the rights of the preference shareholders are directly affected.
The following are the various types of preference shares-
- Participating and Non participating shares
|Participating preference shares||Non participating preference shares|
|There is a Right to participate mentioned in Memorandum or Articles of Association or terms of issue.They are entitled to fixed preferential dividend.In addition right to participate in surplus profits like equity shareholders, after dividend is paid to equity shareholders at a certain rate.On winding up- after preference and equity shareholders, surplus assets are left, they get additional share||There is a right to fixed dividend.The shareholder has the right to capital return.In this case, on winding up, no surplus is given.|
- Cumulative and Non-cumulative Preference shares
|Cumulative Preference shares||Non- Cumulative Preference shares|
|Claim dividend fixed at a sum or percentage for the past and current years out of future profits.Fixed dividend keeps on accumulating till fully paid.||Claim a fixed amount or fixed percentage of dividend out of profits each year.Claim on unpaid dividend can’t be made in subsequent year.Preference shares are cumulative unless mentioned as non-cumulative.|
- Redeemable and Irredeemable shares
Section 55 of the Companies Act, 2013 states-
- No company ltd. by shares can issue preference shares which are irredeemable.
- Co. ltd. by shares, if AoA authorizes, issue irredeemable reference shares liable to be redeemed within a period not exceeding 20 years from date of issue.
- Rule 10, Companies (Share Capital and Debentures) Rules, 2014: co. engaged in infrastructure projects may issue irredeemable preference shares for a period exceeding 20 yrs but not 30 yrs; and redemption of min. 10% sharesper year from 21st year onwards or earlier, on proportionate basis, at the option of the preference share shareholders- mandate.
|Redeemable Preference Shares||Irredeemable Preference shares|
|These types of shares are redeemable after a fixed period of time.||These types of shares cannot be redeemed. They are not allowed under the Companies Act, 2013, except in some cases.|
Conditions for issue of Redeemable preference shares:
- Articles of association of the company must provide for issue of such kinds of shares.
- They must be redeemed only out of profits available for dividends or out of proceeds of fresh issue of shares made for purpose of redemption.
- If premium is payable on shares, it must be paid out of the profits of co. or out of securities premium account before shares are redeemed.
- Shares can’t be redeemed unless fully paid.
- Where shares are redeemed otherwise than out of fresh issue it must be paid out of capital redemption reserve account.
- It doesn’t amount to reduction in share capital.
- Notice of redemption to be sent to Registrar of Companies under Section 64 of the Companies Act, 2013.
- Rule 9, Companies (Share Capital and Debentures) Rules, 2014 states that shares may be redeemed only on terms on which they are issued or as varied after due approval of preference shareholders under Section 48 of the Companies Act, 2013.
- Preference shares may be redeemed:
- At a fixed time or a contingency
- Any time at company’s option
- Any time at shareholder/s’ option.
The Companies Act, 1956 provided the following features for redeemable shares-
- Amendments in 1988 and further in 1996- company’s prohibited from issuing irredeemable/ redeemable after expiry of 20 years from date of issue [S. 80 (5A)].
- Existing irredeemable shares to be compulsorily redeemed within 5 years of commencement of 1988 amendment.
- Existing redeemable shares redeemable after 10 years to be compulsorily redeemed as per terms of issue or within 10 years from commencement of the Amendment.
- S. 80A (1): if co. unable to do the above, co. to issue redeemable shares, and on such issue unredeemed shares shall be deemed to have been redeemed- CLB sanction required (Failure to abide by formalities attract fine up to 1,000 per day during default, every officer Liable for punishment).
- They are provided under Section 43 of the Companies Act, 2013.
- In the common sense, when the term shares is used, it generally refers to equity shares.
- Those shares which are not preference shares, are called equity shares.
- Rate of dividend is not fixed. It is recommended by Board of Directors and declared by shareholders in the Annual General Meeting.
- Equity shareholders have a Right to vote in every meeting.
- The right to vote is proportional to paid up equity capital.
Difference between Equity shares and preference shares
|S. no.||Equity shares||Preference shares|
|1.||The dividend is not fixed and depends upon the amount of net profit available after dividend is paid to the preference shareholders and funds required for future expansion.||The shareholders are entitled to a fixed rate of dividend.|
|2.||No preference is given on repayment of capital on winding up.||Preference is given on repayment of capital on winding up.|
|3.||No arrears are accumulated to be paid in the next years.||In case of cumulative preference shares, arrears are accumulated and until and unless such arrears are paid, no dividend is given to the equity shareholders.|
|4.||Equity shares cannot be redeemed.||Preference shares may be redeemed.|
|5.||They can vote in all the meetings.||They only have restricted voting rights, i.e. can only vote in meetings where their rights are affected.|
|6.||Rights shares or bonus shares may be issued to equity shareholders.||Rights shares or bonus shares are not issued in case of preference shareholders.|
Deferred or Founder Shares
- Deferred or founder shares are held by the promoters or the directors of a company.
- They are usually smaller in denomination.
- They carry equal voting rights.
- The articles of association govern the payment of dividend in case of deferred shares. They are generally of the least priority,
GDRs or Global Depository Receipts
- They are given under Section 41 of the Companies Act, 2013.
- The Companies (Issue of Global Depository Receipts) Rules, 2014 read with FEMA rules and regulations regulate GDRs.
- They can be issued via Public offering or private placement or any other manner prevalent abroad.
- The pre-requisite for issuance of Global Depository Receipts is the passage of resolution of the Board of Directors and special resolution in a General Meeting.
- GDRs can be issued by overseas bank and in such cases, underlying shares are kept in domestic custodian bank.
- Merchant banker/practicing CA/practicing Cost Accountant/ practicing CS are appointed to oversee compliances.
- Provisions applicable to public issue of shares and debentures are inapplicable to Depository Receipts issued abroad.
- Non-voting shares- they are given under S. 43 of the Companies Act, 2013. They were introduced by the Amendment in 2000 in 1956 Act. They do not impart any voting rights to the shareholder.
- Par value of shares: Company may issue shares in any denomination under these types of shares.
Case-laws pertaining to types of Shares
· Tin Plate Dealers Assn (P) Ltd. v. Satish Chandra Sanwalka
In this case, the company proposed to issue equity shares as against preference shares due to the non-payment of dividend. The company did not have any ground showing that the shares were a fair and appropriate representation of the unpaid dividend. In this case, the court held that such a proposal is not allowed and thereby cancelled the same.
· Foster v. Coles, Foster & Sons Ltd.
In this case, the company removed the term ‘cumulative’ from the term ‘cumulative preference shares’ in its Articles of Association to show the fact that the shares are not cumulative. However, the court held that unless it is expressly stated that the shares are non-cumulative, the preference shares are presumed to be cumulative. Therefore, dropping the term ‘cumulative’ from the articles did not have any effect.
· Buenos Aires Great Southern Railway Co., re
The court held in this case that even in case of accumulation of arrears, the preference shareholders do not have the right to compel the directors to pay the dividend to them.
· Lalchand Surana v. Hyderabad Vanaspati Ltd.
The redeemable shareholder cannot treat himself as a creditor where the company does not pay back the redeemable share on maturity. In such a case, they do not have the power to file a petition for winding up of the company with the locus standii of a creditor.
Therefore, the types of shares which a shareholder wants to buy depends on the company policy as well as what the shareholder requires. If the shareholders wishes to participate in all the meetings and have voting rights, then equity shares are preferable. If the shareholder’s goal is only to gain profit
 CIT v. Standard Vacuum Oil Co.,  Comp. LJ 187.
 Bucha F. Guzdar v. Commissioner of Income tax, Bombay LR 617 (SC).
 Tin Plate Dealers Assn (P) Ltd. v. Satish Chandra Sanwalka, (2016) 10 SCC 1.
 Foster v. Coles, Foster & Sons Ltd., (1906) 22 TLR 555.
 Buenos Aires Great Southern Railway Co., re, 1947 Ch 384.
 Lalchand Surana v. Hyderabad Vanaspati Ltd., (1990) Comp. Cas 415 (AP)