UNIT 2: SHARE CAPITAL AND DEBENTURES
Meaning Of Shares - Kinds Of Shares- Voting Rights- Issue Of Shares At A Premium
And Discount- Partly Paid Shares - Bonus Shares - Right Shares- Sweat Equity Shares
- Debenture - Meaning, Types.
Meaning of Shares
The capital of a company is divided into units of a fixed denomination. Share refers to only
such a unit. It is therefore clear that a share is a fractional part of the company’s share capital.
Otherwise, share capital means the capital raised by a company by the issue of shares.
Definition of Shares
According to section 2 (46) of the companies act, a share means a share in the share capital of
the company and includes stock, except where a distinction between stock and shares isexpressor
implied. A share indicates certain rights and liabilities.
Kinds of Shares
KINDS OF
SHARES
1
,According to the Companies Act, 1956 a company can issue only types of shares viz.,
1. Preference Shares and 2. Equity Shares
I. PREFERENCE SHARES
The term preference shares focus certain preferential rights over other types of shares.
They are,
i) A preferential right to get a fixed rate of dividend during the life of the company. It
means that only after payment of dividend to preference shareholders, the surplus, if
any, can be used for paying dividend to equity shareholders.
ii) A preferential right to the return of share capital at the time of winding up of the
company. This means that when the company goes into liquidation, after discharging
debts due to outsiders, the surplus assets must first be used for returning the share
capital contributed by the preference shareholders. The remaining surplus alone will
be enjoyed by equity shareholders.
Preference shareholders must carry both these preferential rights. However, preference
shareholders have certain disabilities. For instance, they do not normally enjoy voting rights.
However they get the right to vote.
1. On any resolution affecting their rights
2. On all resolution when dividend has not been paid to them for certain period as prescribed
in the Act.
Kinds of Preference Shares
Preference shares are of different types based on differing rights. They are briefly
described below;
1. Cumulative Preference Shares
In case dividend is not declared, because of inadequate profit, the right to dividend for that
year does not lapse in the case of cumulative preference shares. Dividends not declared and paid
get accumulative so that they may be paid out of profits of subsequent years of arrears of dividend
before any dividend is paid to equity shareholders.
Preference shares are always cumulative, unless the contrary is expressly stated in the
Articles of Association.
2. Non Cumulative Preference Shares
In the case of non cumulative preference shares if dividend is not paid in any particular
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, year, it lapses. Dividend is not allowed to accumulate and such unpaid dividend will not be paid
in subsequent years even though sufficient profits are earned.
3. Participating Preference Shares
In addition to the fixed rate of dividend, these shares carry a further right to participate
with equity shareholders in the surplus profits which remain after paying a certain rate of dividend to
equity shareholders. Thus they get two kinds of dividend, one fixed rate and the other changing every
year depending on the level of excess profits.
Similarly such preference shares have a right to participate in the surplus assets of the
company on its winding up after paying in full the preference and equity share capital.
The right to participate in the surplus profits or surplus asset at the time of winding up is
available to preference shareholders only if it is specially expressed in the articles. In other words
preference shares are presumed to be non-participating unless specifically stated otherwise in the
articles.
4. Non Participating Preference Shares
These shares are entitled to only a fixed rate of dividend. They do not participate either in the
surplus or in the surplus assets. In such a case, the entire surplus goes to equity shareholders.
If the articles are silent with regard to this right to participate in the surplus profit or surplus
assets, the preference shares will be considered to be only of non-participating type.
5. Convertible Preference Shares
Where preference shares entitle their shareholders to convert their preference shares into
equity shares within a specified period, they are known as convertible preference shares.
6. Non-Convertible Preference Shares
Where preference shares cannot be converted into equity shares, they are called non-
convertible preference shares. Once issued as preference shares, they continue to be only
preference share throughout the life time of the company without any change in their
characteristics.
If the Articles are silent regarding this right to convert, the preference share will be
considered to be only non-convertible preference shares.
7. Redeemable Preference Shares
If the Articles of Association authorize, a company can issue redeemable preference
shares. It means, that the capital raised by means of these shares can be returned after a specified
period or at any time at its options after giving notice as per terms of issue. These shares can be
3
Meaning Of Shares - Kinds Of Shares- Voting Rights- Issue Of Shares At A Premium
And Discount- Partly Paid Shares - Bonus Shares - Right Shares- Sweat Equity Shares
- Debenture - Meaning, Types.
Meaning of Shares
The capital of a company is divided into units of a fixed denomination. Share refers to only
such a unit. It is therefore clear that a share is a fractional part of the company’s share capital.
Otherwise, share capital means the capital raised by a company by the issue of shares.
Definition of Shares
According to section 2 (46) of the companies act, a share means a share in the share capital of
the company and includes stock, except where a distinction between stock and shares isexpressor
implied. A share indicates certain rights and liabilities.
Kinds of Shares
KINDS OF
SHARES
1
,According to the Companies Act, 1956 a company can issue only types of shares viz.,
1. Preference Shares and 2. Equity Shares
I. PREFERENCE SHARES
The term preference shares focus certain preferential rights over other types of shares.
They are,
i) A preferential right to get a fixed rate of dividend during the life of the company. It
means that only after payment of dividend to preference shareholders, the surplus, if
any, can be used for paying dividend to equity shareholders.
ii) A preferential right to the return of share capital at the time of winding up of the
company. This means that when the company goes into liquidation, after discharging
debts due to outsiders, the surplus assets must first be used for returning the share
capital contributed by the preference shareholders. The remaining surplus alone will
be enjoyed by equity shareholders.
Preference shareholders must carry both these preferential rights. However, preference
shareholders have certain disabilities. For instance, they do not normally enjoy voting rights.
However they get the right to vote.
1. On any resolution affecting their rights
2. On all resolution when dividend has not been paid to them for certain period as prescribed
in the Act.
Kinds of Preference Shares
Preference shares are of different types based on differing rights. They are briefly
described below;
1. Cumulative Preference Shares
In case dividend is not declared, because of inadequate profit, the right to dividend for that
year does not lapse in the case of cumulative preference shares. Dividends not declared and paid
get accumulative so that they may be paid out of profits of subsequent years of arrears of dividend
before any dividend is paid to equity shareholders.
Preference shares are always cumulative, unless the contrary is expressly stated in the
Articles of Association.
2. Non Cumulative Preference Shares
In the case of non cumulative preference shares if dividend is not paid in any particular
2
, year, it lapses. Dividend is not allowed to accumulate and such unpaid dividend will not be paid
in subsequent years even though sufficient profits are earned.
3. Participating Preference Shares
In addition to the fixed rate of dividend, these shares carry a further right to participate
with equity shareholders in the surplus profits which remain after paying a certain rate of dividend to
equity shareholders. Thus they get two kinds of dividend, one fixed rate and the other changing every
year depending on the level of excess profits.
Similarly such preference shares have a right to participate in the surplus assets of the
company on its winding up after paying in full the preference and equity share capital.
The right to participate in the surplus profits or surplus asset at the time of winding up is
available to preference shareholders only if it is specially expressed in the articles. In other words
preference shares are presumed to be non-participating unless specifically stated otherwise in the
articles.
4. Non Participating Preference Shares
These shares are entitled to only a fixed rate of dividend. They do not participate either in the
surplus or in the surplus assets. In such a case, the entire surplus goes to equity shareholders.
If the articles are silent with regard to this right to participate in the surplus profit or surplus
assets, the preference shares will be considered to be only of non-participating type.
5. Convertible Preference Shares
Where preference shares entitle their shareholders to convert their preference shares into
equity shares within a specified period, they are known as convertible preference shares.
6. Non-Convertible Preference Shares
Where preference shares cannot be converted into equity shares, they are called non-
convertible preference shares. Once issued as preference shares, they continue to be only
preference share throughout the life time of the company without any change in their
characteristics.
If the Articles are silent regarding this right to convert, the preference share will be
considered to be only non-convertible preference shares.
7. Redeemable Preference Shares
If the Articles of Association authorize, a company can issue redeemable preference
shares. It means, that the capital raised by means of these shares can be returned after a specified
period or at any time at its options after giving notice as per terms of issue. These shares can be
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