Companies Act Section 43

Companies Act Section 43: Kinds of Share Capital

1. Types of Share Capital

Under Section 43 of the Companies Act, the share capital of a company that is limited by shares is broadly classified into two primary categories: Equity Share Capital and Preference Share Capital. 

Each type of share capital carries distinct rights and privileges, which are essential for understanding the financial and voting structure of the company.

a. Equity Share Capital

Equity share capital represents the ownership stake in the company and is further divided into two subcategories based on the rights attached to these shares:  

Equity Share Capital with Voting Rights: 

These shares provide shareholders with the right to vote on company matters, particularly in general meetings. 

The voting rights are typically proportional to the number of shares owned, giving shareholders influence in the decision-making processes, such as the election of directors, major corporate actions, and other governance issues.  

Equity Share Capital with Differential Rights: 

This category of equity shares comes with differential rights regarding dividend, voting, or other matters. 

Such shares may offer different voting rights or entitlements to dividends compared to ordinary equity shares. 

For example, some shares might have enhanced dividend rights but limited or no voting power, as permitted under the prescribed rules. 

These variations allow companies to tailor their capital structure according to their financial and strategic goals.

b. Preference Share Capital

Preference share capital refers to shares that give certain preferential rights over other types of shares, especially equity shares. 

These rights mainly concern dividends and the repayment of capital in the event of the company’s winding up. 

Holders of preference shares generally receive a fixed dividend, which may be paid before any dividend is declared for equity shareholders. 

Furthermore, preference shareholders have a priority claim over the company’s assets upon liquidation, meaning they are repaid their capital investment (including any premium) before equity shareholders.

2. Rights of Preference Shareholders

The rights of preference shareholders have been preserved even after the commencement of the Companies Act. 

Specifically, the rights to participate in the distribution of proceeds during a company’s winding up remain intact, ensuring that these shareholders continue to receive preferential treatment when it comes to the repayment of capital, as was the case before the current Act came into force. 

This provision ensures continuity and protection of the financial interests of preference shareholders.

3. Definitions and Explanation of Key Terms

Section 43 also provides detailed definitions and clarifications of the different types of share capital, helping to delineate the specific rights and characteristics of equity and preference shares.

a. Equity Share Capital

Equity share capital refers to all the share capital of a company that is not classified as preference share capital. 

These shares typically offer shareholders the right to participate in the company’s governance through voting and to share in the profits through dividends, although dividends are paid only after the preference shareholders have received their due. 

Voting Rights: 

Equity shareholders are entitled to vote on important matters related to the company, with each share typically granting one vote.

Dividend Rights: 

While equity shareholders are entitled to dividends, they receive them only after preference shareholders, and the dividend amount is variable, depending on the company’s profitability and decisions of the board.

b. Preference Share Capital

Preference share capital is a portion of a company’s issued share capital that offers specific preferential rights. 

These rights distinguish preference shares from equity shares and provide certain advantages to preference shareholders:  

Preferential Right to Dividends: 

Preference shareholders are entitled to a dividend that is fixed in amount or rate, and this dividend is paid out before any dividends are paid to equity shareholders. 

This preferential right can either be free from income tax or subject to income tax, depending on the terms laid out in the company’s memorandum or articles of association.

Preferential Right in Winding Up: 

Preference shareholders have a priority claim over the company’s assets in case of liquidation or winding up. 

This means that, after the company's liabilities are settled, the capital invested by preference shareholders is repaid before equity shareholders receive any distribution. 

In addition, if the company’s memorandum or articles of association specify a fixed premium or other premium, preference shareholders are entitled to receive this amount along with the repayment of capital during winding up.

c. Characteristics of Preference Share Capital

While preference share capital provides the holder with preferential rights, there are certain conditions under which preference shares may also share some features traditionally associated with equity shares. 

Participation in Dividends Alongside Equity Shareholders: 

Even though preference shareholders are entitled to a fixed dividend, the company may allow them to participate in additional dividends alongside equity shareholders. 

This can happen either fully or partially, depending on the terms specified in the company’s governing documents. 

Essentially, after receiving their fixed preferential dividend, preference shareholders might also be entitled to a share of any surplus profit distributed as dividends to equity shareholders.

Participation in Surplus Capital upon Winding Up: 

In some cases, preference shareholders may be permitted to participate in the surplus capital of the company, alongside equity shareholders, in the event of liquidation. 

Once all the company’s capital has been repaid, including the fixed preference dividend and the capital owed to preference shareholders, any remaining surplus may be distributed between preference and equity shareholders. 

Again, this participation can be either full or partial, as outlined in the company’s articles or memorandum.