Types of Shares: Meaning of Shares, Equity Share, Preferential Share

It also states the opening date of subscription list, amount payable on application, on allotment & the earliest closing date of the subscription list. Conversely, holders of non-convertible preference shares are not entitled to that provision. It denotes the total amount of capital that a company can raise by issuing stocks, as mentioned in the Memorandum of Association (MoA). Preference shares carry special rights or preferential treatments, especially in regard to dividend receipt and capital reimbursement when an organisation types of issue of shares is winding up. Share, as defined in the Companies Act 2013, is the measure of a shareholder’s interest in a company’s assets. In other words, shares represent a shareholder’s stake of ownership of a company.

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After the last date of the receipt of applications is over, the Directors, Procide with the allotment work. However, a company cannot allot the shares unless the minimum subscription amount mentioned in the prospectus is collected within a stipulated period. When an issuer makes an additional issue of securities to its existing shareholders free of cost, it is called a bonus issue. Therefore, when a company’s net income is substantially high, such shareholders stand to receive a part of such profits. On the other hand, holders of non-participating shares are only entitled to a fixed dividend payment. In other words, preference shareholders receive dividends on the highest priority and also companies return their capital before ordinary shareholders when undergoing liquidation.

Process of the issue of shares

1. As the name suggests, these shares might be bought back by an enterprise that sold them for the first time from the shareholders.
2. When an issue of securities is made by an issuer to its present/existing shareholders, it is called a right issue.
3. An equity shareholder is entitled to voting rights on various issues of the company.
4. After all the conditions and formalities are fulfilled, the Board of Directors can proceed to allot shares as per SEBI guidelines after obtaining permission from the stock exchange.
5. 3rd- The shares will be allocated to the concerned investor along with a confirmation letter.

ABC Ltd is a company having a share capital of Rs. 10 lakh, which is divided into 10,000 shares with a face value of Rs. 100 each. If anyone wishes to buy a stake in ABC Ltd, they can purchase shares at Rs. 100 each. This capital cannot be called for payment from the shareholders except in the case of winding-up. The amount of call money that has not been paid by the shareholders is termed as calls-in-arrear. However, the provision of this section does not apply to a private limited company that is not a subsidiary of a Public Company.

For example, H Ltd. has Rs. 8, 00,000 authorized capital of Rs. 10 each out of which it invited applications for the issue of 50,000 shares of Rs. 10 each. One of the primary aims of allotting shares is to raise capital for the company. Allotting shares allows the company’s ownership to be available for distribution among many shareholders. This leads to increased liquidity in the company’s stock as more investors participate in trading, potentially improving the stock’s marketability. While dilution is not necessarily an aim, it’s an outcome that needs management while allotting new shares. The types of issues of shares are usually set by a company or enterprise that is issuing its share to the public.

It is for the same reason that anyone holding a share is termed as a shareholder. Commerce Mates is a free resource site that presents a collection of accounting, banking, business management, economics, finance, human resource, investment, marketing, and others. Share allotment benefits employees through Employee Stock Ownership Plans (ESOPs), aligning employee interests with the company’s success.

While the former allows for voting rights to the shareholders, the latter does not permit the holders of any rights. The Directors pass resolution in the board meeting for allotment of shares indicating clearly the class & no. of shares allotted with the distinctive numbers. Letters of Regret are sent to those who are not allotted any shares & application money is refunded to them. When an issue of securities is made by an issuer to its present/existing shareholders, it is called a right issue. The rights are offered in a particular ratio to the number of securities held as on the record date.

What are Equity Shares?

Properly filled-in application forms must be forwarded to the company or to the bankers to the issue along with necessary application money. It may be mentioned here that there are legal restrictions imposed on the company under Section 53 of the Companies Act, 2013 for the issue of shares at a discount. Sometimes some shareholders may pay a part or whole of the amount due on a share before the amount is called up. Equity share is also called ordinary share or nominal share or common share. The holders of these shares are the real owners, risk-takers, and care-takers of the company and they have control over the affairs of the company and enjoy the right of voting. Suppose XYZ Tech Solutions, a cutting-edge technology company, decides to go public through an IPO.

From the point of view of Price of Issue

In another instance, when there is a bankruptcy, the preferred shareholders are given preference in matters of dividend sharing. So, they receive the dividend even before the common shareholders and have an upper hand. The outstanding amounts are transferred to an account called up as “Calls-in-Arrears” account. The Balance of calls-in-arrears account is deducted from the Called-up capital in the Balance Sheet. Conversely, in the case of non-cumulative preference shares, the dividend amount is not carried forward if an organisation does not pay dividends in a specific year.

These shares can be purchased by public individuals or even corporations. A share is a unit of the total capital of an enterprise divided into equal portions in the profits of the company (if there is profit) in the form of dividends. So, if a total capital of an enterprise is Rs.100 and divided into 20 parts, then each share will cost Rs.5, which can be bought by individuals or companies. There are a number of different types of shares including right shares, preference shares, bonus shares, sweat equity shares, equity shares, and employee stock options plans. It is a minimum amount that must be raised when the shares are offered to the public during the issue of shares. This minimum subscription cannot be less than 90% of the issued capital and is usually set by the Board of Directors.

It is the amount that has been called for by the company but has not been paid by the shareholders. In other words, it is the amount remaining unpaid on allotted shares, although it has been called up. Authorized share capital is the maximum amount of share capital that the company is empowered to issue.

Redeemable and Irredeemable Preference Shares

Due to the difference in voting rights, the ‘A’ equity shares traded at a discount to ordinary shares with complete voting rights. The authorized signatory is at least one director of the company and the company secretary. On allotment of shares, share certificates are issued to the successful applicants. A Share Certificate is a document that provides evidence of ownership of shares in a limited company.

Issue of Shares is the process in which companies allot new shares to shareholders. The company follows the rules prescribed by Companies Act 2013 while issuing the shares. As the name suggests, issued share capital refers to the amount of capital a company raises by means of issuing stocks. While this entitles you to receive profits in the form of dividends from the company, you also have to partake in the losses. In contrast, preference shares give you a fixed dividend at lower risk.

The following are some of the examples where an Allotment of Shares may be considered. This is the first step of the Issue of Shares wherein an enterprise releases a prospectus to the public. It is also considered as an asset because in case a company makes a profit, an amount in proportion to the share held by you will be provided to you in the form of a dividend. Anyone who holds a share is called a shareholder for that specific financial asset or organization. When an issue/offer of securities is made to the public for subscription/purchase, it is called a public issue.