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| Classes of Shares |
Capital for a new industry may be raised by public or private subscription of shares. Large amount of funds cannot be raised unless an appeal is made to the people of different temperaments. By issuing different classes of shares funds may be raised from the greatest risk taking persons to the most cautious one.
Shares of different denominations are issued to attract both rich and poor investors. Shares of high denominations usually have a restricted field of drawing capital for the company. people with small savings may not be able to purchase them.
Cost of financing, money market conditions and the time of issue are a few other factors which also suggest that different classes of shares be issued. Raising of capital by issuing different classes of shares may result in lesser cost as compared to issue of only one class of shares. During period of depression, preference shares and likely to find a better market than the equity shares, which can be marketed with greater ease during periods of rising prices.
Company, the income of which may not be certain or sufficient or which proposes to engage in a business of speculative nature, shall not be in a position to collect its capital by issuing preference shares. The only method available for such a company to raise its capital would be to issue equity shares.
The amount of capital which a company may raise by means of shares is stated in its memorandum of association. The number of shares in which such capital is to be divided is also mentioned therein. The rights of each class of shares, are, however, laid down by the Articles of Association and fixed up by the terms of issue. It is open to the company to issue more than one class of shares.
The important classes of shares are as under:-
1. Preference Shares
a) Cumulative preference shares
b) Non- cumulative preference shares
c) Participating preference shares
d) Redeemable preference shares
2. Equity Shares
3. Deferred Shares
A brief discussion of the above classes is a s under:-
Preference Shares
A preference share carries a preferential right over other classes of shares in respect of (a) a fixed dividend, and (b) repayment of capital in the event of the winding up of the company.
Company law does not give any right to the preference share- holders to vote on any resolution except those which directly affect the rights attached to their shareholdings. But a preference shareholder may claim a right to vote similar to the equity shareholders in case the dividend on preference shares has not been paid. (i) for the last two years on the cumulative preference shares, or (ii) for three years on the non-cumulative preference shares,
Cumulative Preference Shares
Preference shares are always cumulative unless otherwise stated. A cumulative preference share has a right to claim the fixed dividend of the current year out of the future profits. the dividend, in their case, will go on accumulating unless paid. The accumulated areas of dividend shall be paid before anything is paid out of the profits to the holders of any other class of shares, If the company is unable to earn sufficient profits in any year to pay dividend on preference shares, the deficiency shall be made good out of the profits of the subsequent years.
Non- Cumulative Preference Shares
Dividend on non-cumulative preference shares shall be payable only out of the profits of the current year. It shall not be allowed to accumulate to be paid out of the profits of future years, The right to claim dividend will lapse if there are no profits in a particular year,
Participating Preference Shares
These preference shares carry a right: (i) to a fixed share in the surplus profits in addition to the dividend to which they are entitled after a certain minimum has been paid on other classes of shares, or (ii) in the surplus assets of the company on its winding up.
Redeemable Preference Shares
Such shares the company is liable to redeem either on the expiry of the fixed period for which they were issued or at its own option. Companies act lays down the necessary conditions for the redemption of such shares.
Equity Shares
They are very much similar to the ordinary shares which the companies have been issuing. All the shares other than the preference shares shall now be known as equity shares. Equity shares don not carry any preferential rights. All the equity shares shall enjoy the same rights with regard to voting, dividend and return of capital etc. For the purpose of dividend and repayment of capital they rank after the preference shares. They enjoy all the profits left out after paying a fixed rate of dividend on the preference the shares. Equity shareholders participate in the profits of the company in proportion of the amount of capital that they own. They voting rights are proportionate to the amount paid upon those shares. Equity shares carrying on disproportionate voting rights cannot be issued.
Deferred Shares
Public limited companies cannot issue deferred shares carrying on disproportionate voting rights to the amount paid up thereon. However, private limited companies may issue such shares. Deferred shares rank for dividend and return of capital after all other classes of shares have received a fixed rate of dividend or have been paid out in the case of winding up of the company. generally, these shares are of very low denomination and are purchased by those who want to keep the control and management of the affairs of the company in their hands. they are mostly issued to the promoters as fully paid up. They get dividend only after an agreed rate of dividend has been paid to the preference and ordinary shareholders. "Though generally few in number and insignificant in nominal value the voting power which they command and the profits they share are often considerable."
