Difference between Equity Shares and Preference Shares

Types of shares:

According to section 43 of the Companies Act 2013, a company can issue only two types of shares:

(a) Equity shares: Equity shares are further classified into:

– Equity shares with voting rights

– Equity shares with differential rights as to dividend, voting etc.

(b) Preference shares.

Meaning of Equity Shares

Equity shares are instruments to raise equity capital. The equity share capital is the backbone of any company’s financial structure. Equity capital represents ownership capital. Equity shareholders collectively own the company. They enjoy the reward of ownership and bear the risk of ownership. The equity share capital is also termed as the venture capital on account of the risk involved in it. The equity shareholders’ liability, unlike the liability of the owner in a proprietary concern and the partners in a partnership concern, is limited to their capital contribution.

According to Sec. 43 (a) of the Companies Act 2013 “an equity share is share which is not preference share”. An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.

Now a days equity capital is raised through global equity issues. Global depository receipts (GDRs), American depository receipts (ADRs), etc. are certain instruments used by Indian companies to overseas capital market to get equity capital.

Meaning of Preference Share

According to Sec. 43 (a) of the Companies Act 2013, a share that carries the following two preferential rights is called ‘Preference Share’:

(i) Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity Shares.

(ii) Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned in case the company is going to wind up.

In case of preference shares, the rate of dividend is fixed and the dividend on these shares must be paid before any dividend is paid to equity share holders. Directors, however, may decide not to pay any dividend to any class of shareholders even if there are sufficient profits.

Difference between Equity Shares and Preference Shares

Basis Equity Share Preference Share
Ownership Equity shareholders are primary owners of company. Preference shareholders are secondary owners of company.
Right of Dividend Equity shares are paid dividend out of the balance of profit available after the dividend paid to preference shareholders. Preference shares are paid dividend before the Equity shares.
Rate of Dividend Rate of dividend is decided by the Board of Directors, depending on the profits of the company. Rate of dividend is fixed in case of preference shareholders.
Convertibility Equity shares cannot be converted into preference shares. Preference Shares may be converted into Equity shares, if the terms of issue provide so.
Voting Right Equity shareholders have voting rights in all circumstances. Preference shareholders do not carry the voting right. They can vote only if preference dividend is not paid for a period of two years or more.
Redemption of Share Capital A company may buy-back its equity shares. Preference shares may be redeemed.
Control and management Equity shareholders have a right to control the management of company. Preference shareholders have no right to take part in management.
Bonus and right shares Bonus and right shares can be issued to the existing shareholders. Bonus and right shares are not allowed to the preference shareholders.

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