‘Shares’ in India have always been referred to as equity shares. This is because all other types of shares have either been unavailable for public trading or traded beyond the traditional stock exchange.
As the term denotes, a share refers to the investor’s stake of ownership in a company. Due to ownership and authority, it is common for companies to have different classes of shares. As per section 43 of the companies act 2013, shares are categorised into two types:
- Equity Shares
- Preference Shares
Both these classes of shares might vary depending on the share in profitability, voting rights, decision making, and settlement of assets at the time of liquidation. This article contains all essential information about these two major classes of shares in India.
What Are Equity Shares
Also known as ordinary shares, equity shares are traded on the stock exchange, and most companies in India only have these shares. Equity shares represent investors’ basic voting rights and reflect company equity ownership.
Equity shares often come with voting and settlement rights to give equal rights to each dividend. Moreover, these shares give the right to the distribution of the company’s assets in the event of winding-up or acquisition.
What Are Preference Shares
An upgraded version of equity shares, these shares gives investors the right to dividends, which means they will receive a fixed amount of dividend in the company ahead of equity shareholders. Moreover, preference shareholders have a higher priority claim to the company’s assets than equity shareholders.
Since this class of share carries multiple benefits and guarantees, it is usually issued to venture capitalists, private equity investors and other financial institutions. However, preference shareholders do not have the same rights as equity shareholders and often do not have voting rights. Redeemable preference shares allow shareholders to repurchase shares in future if the interest rates fall and the company chooses to reissue its shares with a lower dividend rate.
So, you see the basic differences between these two classes of shares. Let’s now dive deep and find the major differences between these two classes of shares.
Difference Between Equity Shares and Preference Shares
Besides voting rights and liquidation, there are many other differences between these two classes of shares in India. Below is a detailed description and categorisation of these two classes of shares in India.
Equity or ordinary shares differ from the stocks a company issues to raise capital. Typically ordinary shareholders enjoy voting rights, access to general & annual meetings of the company, and are also entitled to a portion of the company’s surplus profit. When it comes to categorisation, equity shares are divided as follows.
Companies often offer this type of stock to their existing shareholders. Often termed as Unlisted or pre IPO shares, they are available to shareholders before they are open to external investors.
These shares are often issued for monetary compensation for dividends. Existing shareholders are entitled to buy bonus shares, but companies often issue these shares to convert retained earnings into equity shares.
Sweat Equity Share
Companies issue shares to their employees and directors as compensation when they perform excellently. With these sweat equity shares, companies retain efficient employees by providing them with an ownership stake.
Preference shares come with special rights and privileged treatments, especially regarding dividend receipts and capital reimbursements when an organisation is winding up. Additionally, preference shareholders enjoy the guarantee and benefits of fixed dividends, unlike equity shareholders. Preference shares are also categorised as follows.
Cumulative And Non-Cumulative Preference Shares
If a company does not provide dividend for preference share in one year, they will be carried forward if it is cumulative shares. Contrary to cumulative shares, the dividend is not carried forward in non-cumulative shares.
Participating And Non-Participating Preference Shares
Participating shareholders have the right to partake in a company’s profit once the shares and dividends are allocated to its shareholders. Non-participating shares, on the other hand, are limited to a fixed amount of dividend payment.
Convertible And Non-Convertible Preference Shares
Other types of preference shares are convertible and non-convertible shares. This allows the investors to convert their holdings to equity shares upon meeting specific regulations and conditions. However, the holders of non-convertible shares are not applicable for this provision.
Redeemable And Irredeemable Preference Shares
In the case of redeemable shares, the issuing company and shareholders agree that the company can redeem or buy back those shares at a later period. Redeemable shares might vary depending on the buy-back provision – a shareholder or the issuing company. Irredeemable shares are the opposite of redeemable shares.
If you plan to invest in the share market, unlisted and pre-IPO shares come with lucrative opportunities to multiply your investment. Want to learn more about unlisted share trading? Connect with our experts today!