What are kind or classes of shares issued by companies in accounting ?

Definition

Section 43 of the companies act 2013 prescribes that the share capital of a company broadly can be of two types or classes :

1. Preference shares
2. Equity shares

Preference shares

Preference shares are the shares that carry the following  two preferential rights :

• Preferential rights to receive dividends, to be paid as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income tax before it is paid to equity shareholders, and
• Return of capital on the winding up of the company before that of equity shares.

Classes of preference shares

Preference shares are broadly classified as follows :

• With reference to the dividend
• Participation in surplus profit
• Convertibility
• Redemption

With reference to the dividend

Cumulative preference shares are those preference shares that carry the right to receive arrears of dividends before the dividend is paid to the equity shareholders.

Non-cumulative preference shares are those that do not carry the right to receive arrears of dividends.

Participation in surplus profit

Participating preference shares of the company may provide that after the dividend has been paid to the equity shareholders, the holders of preference shares will also have a right to participate in the remaining profits.

Non-participating preference shares are those preference shares that do not carry the right to participate in the remaining profits after the equity shareholders have paid the dividend.

Convertibility

Convertible preference shares are those preference shares that carry the right to be converted into equity shares.

Non-convertible preference shares are those that do not carry the right to be converted into equity shares.

Redemption

Redeemable preference shares are those preference shares that are redeemed by the company at the time specified for the repayment or earlier.

Irredeemable preference shares are preference shares the amount of which can be returned by the company to the holders of such shares when the company is wound up.

Equity shares

Equity shares are those shares that are not preference shares.

Equity shares are the most commonly issued class of shares that carry the maximum ‘risk and reward ‘ of the business the risks of losing part or all the value of the shares if the business incurs losses.

The rewards are the payment of higher dividends and appreciation in the market value.