SUDIP CHAKRABORTY
The Concept of SHARES & SHARE CAPITAL
Shares
Capital is the lifeblood of a business as it is required for earning revenue. The capital of a company is usually divided into different units of a fixed amount known as ‘shares’.
Each share is distinguished by its specific number and a certificate is issued to the shareholders under the common seal of the company. The certificate is known as‘Share Certificate’.
TYPES OF SHARES
Shares are basically of two types;
(i) Preference Shares
(ii) Equity Shares
Preference Shares :
Preference shares are those shares that carry preferential rights in respect of payment of dividend and return of capital in the event of liquidation of the company. The preference shareholders are paid dividend at a fixed rate before, dividend is paid to equity shareholders.
For example, 10% preference shares means dividends shall be paid at the rate of 10 percent on paid-up capital when the company distributes dividends to shareholders.
Types of Preference Shares:
There are different types of preference shares on the basis of (i) redemption,(ii) conversion into equity shares, (iii) accumulation of arrear of dividends, and (iv) participation in the surplus profit of the company.
On the basis of the accumulation of arrear dividends:
On this basis, preference shares may be cumulative or non-cumulative preference shares.
(i) Cumulative Preference Shares: These shares carry the right to arrear of dividend if the company had not paid dividend for any year. If the company declares dividend for a year, the cumulative preference shareholders are paid their arrear dividend first before any dividend is paid to equity shareholders. Thus, the arrear of dividend accumulates till it is paid by the company.
(ii) Non-cumulative Preference Shares: The non-cumulative preference shares are not entitled to arrear of dividend. In other words, the arrear of dividend do not accumulate and such shareholders are paid a dividend for the current year (if the company declares a dividend) before the dividend to equity shareholders is paid.
On the basis of redemption :
Preference shares may be redeemable or irredeemable on the basis of redemption (return of capital).
(i) Redeemable Preference Shares: Redeemable Preference Shares are those preference shares on which the amount is returned by the company to the shareholders after the expiry of a fixed term within the life of the company. Ordinarily, shares are not redeemable (refundable) unless the company goes into liquidation.
(ii) Irredeemable Preference Shares: The preference shares which are not redeemable within the life of the company or redeemed only at the time of liquidation of the company are called irredeemable preference shares.
On the basis of participation in surplus profit :
On the basis of participation in surplus profit of the company, preference shares may be participating or non-participating preference shares.
(i) Participating Preference Shares: The preference shares which carry the right to share the surplus profit of the company remaining after paying dividends to equity shareholders at a certain rate are called participating preference shares. The surplus profit is distributed between participating preference shareholders and equity shareholders on a certain agreed ratio.
(ii) Non-participating Preference Shares: Non-participating preference shares are entitled only to a fixed rate of dividend and do not share in the surplus profit or assets of the company.
On the basis of conversion :
On the basis of conversion into equity shares, preference shares may be convertible or non-convertible preference shares.
(i) Convertible Preference Shares: The preference shares which carry the right to be converted into equity shares within a specified period or at a specified date according to the terms of the issue are called convertible preference shares.
(ii) Non-convertible Preference: The preference shares which do not carry the right of conversion into equity shares are known as non-convertible preference shares.
Equity Shares :
Shares that are not preference shares are equity shares. Such shares are also known as ordinary shares. These shares do not have any preferential right as to dividend or return of capital in the event of winding up of the company. The rate of dividend on such shares is not fixed. Equity shareholders are the real owners of the company because they bear the risk. They may not get any dividend in the year of the loss or insufficient profit and receive a relatively higher return in the year in which the company earns a higher profit. Equity shares carry voting rights on all matters and the shareholders have control over the affairs of the company.
Stock :
Stock is the aggregate of fully paid up shares. It can be considered as a set of shares put together in a bundle. Stock can be split into fractions of any amount without regard to the original face value of shares. The value of the stock depends upon the number of fully paid-up shares consolidated. Conversion of shares into stock is made provided the Articles of Association of the company permit.
Features of Preference Shares :
(i) Preference shares have priority over payment of dividends and repayment of capital.
(ii) The rate of dividend on preference shares is fixed. Only in the case of participating preference shares additional dividend may be paid if profits remain after paying equity dividend.
(iii) Except in the case of redeemable preference shares, the preference share capital remains with the company on a permanent basis.
(iv) Preference shares do not create any charge over the assets of the company.
(v) Preference shareholders do not hold voting rights.
Merits / Advantages :
(i) Rate of return is guaranteed. Investors who prefer safety on their capital and want to earn income with greater certainty, always prefer to invest in preference shares.
(ii) Helpful in raising long-term capital for a company.
(iii) Control of the company is vested with the management as preference shareholders have no voting rights.
(iv) Redeemable preference shares have the added advantage of repayment of capital whenever there is a surplus in the company.
(v) There is no need to mortgage property on these shares.
Disadvantages :
(i) Permanent burden on the company to pay a fixed rate of dividend before paying anything on other shares.
(ii) Not advantageous to investors from the point of view of control and management as preference shares do not carry voting rights.
(iii) Compared to other fixed interest-bearing securities such as debentures, usually the cost of raising the preference share capital is higher.
Features of Equity Shares
(i) Equity share capital remains permanently with the company. It is returned only when the company is wound up.
(ii) Equity shareholders have voting rights and elect the management of the company.
(iii) The rate of dividend on equity capital depends upon the availability of surplus funds. There is no fixed rate of dividend on equity capital.
Advantages
(i) Equity shares do not create any obligation to pay a fixed rate of dividend.
(ii) Equity shares can be issued without creating any charge over the assets of the company.
(iii) It is a permanent source of capital and the company has to repay it only under liquidation.
(iv) Equity shareholders are the real owners of the company who have voting rights.
(v) In the case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.
Disadvantages
(i) As equity capital cannot be redeemed, there is a danger of over-capitalization.
(ii) Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.
Why do Companies issue Shares to the Public?
Companies issue shares to the public in order to raise capital or to finance their business operations, expand the business, and meet other financial needs. After the acceptance of shares by the company, the applicant becomes a shareholder in the company, and they get the right to receive dividends on their investments.
