Unformatted text preview: MBA Education & Careers Types of Shares S ometime back we had carried an article
on the meaning of share, and related
terms. In this article, we will focus on
types of shares. On the basis of the rights of
shareholders with regard to casting their vote and
receiving dividends, shares can be broadly
classified into three types as follows: Shares
Shares EQUITY SHARES
Equity shares are regarded as corner-stone of
the financial structure of a company without
which a company cannot be founded.
Equity shareholders are residual owners who
have unrestricted claim on income and assets
and who possess voting power in the company.
Equity shareholders are considered as ‘owners’
of the company. Similarly, at the time of
liquidation of the company, they will be last
to receive anything from out of the assets of
If company earns sufficiently larger profits,
they are the maximum beneficiaries. On the
other hand, they are the biggest losers if the
company suffers any loss. In fact, these equity
shareholders are exposed to the highest risk.
It is for this reason that share capital is also
called risk capital. Characteristics
Permanent Capital: The capital raised through
the issue of equity shares is permanent. As long
as a company exists, this capital need not be paid
back. As the shares are transferable, they provide
liquidity to the shareholders.
Claims on Income : Equity shareholders are
residual owners whose claims on income arise only
after the claims of creditors and preference
shareholders have been met. In such case, there is
no guarantee that they will receive dividends every
year. Even if a company earns adequate profits, it
need not pay dividends to equity shareholders.
Claims on Assets: In the event of the company’s
liquidation, equity shareholders have the last
claim on the assets of the company. After all
claims have been met, they are entitled to receive
all that is left.
No Charge: To raise capital, the company need
not create charge on the assets of the company.
Limited liability: The liability of shareholders is
limited to the par value of shares held by them. In
case of partnership firms and proprietary concerns,
the liability is unlimited, joint and several.
Control: Equity shareholders have unchallenged
voice in management and control of the company.
They exercise control through voting power and
electing the board of directors. The board of
directors act according to the directions of the
December 2007 45 MBA Education & Careers ECO FUNDAS FOR YOU: TYPES OF SHARES
Pre-emptive Right: All companies have a legal
obligation to offer new issues to the existing equity
shareholders in the existing proportion before
placing them in the market for public subscription.
This right of equity shareholders to purchase new
shares is called “pre-emptive right”. The sale of
equity shares to the existing shareholders as a matter
of privilege is referred to as “rights offering or
issue”. This helps the shareholders as it does not
dilute their controlling power. Also, the company
gets to carry out its objectives uninterruptedly.
☞ Equity share capital is the most powerful and reliable source of finance.
☞ As there is no legal obligation to pay dividends every year, equity capital involves
☞ Equity capital does not create any charge on the assets of the company.
☞ This capital enables the company to plough back the profits and use them for future
expansion and growth.
☞ Due to the operation of financial leverage, equity shareholders gain more.
☞ Excess mobilisation of equity may lead to a situation of over-capitalisation. This
reduces the profitability of the company.
☞ Over-dependence on equity may result in depriving the company of using debt capital,
which is a cheaper source of finance.
☞ Control of the company may get diluted, when it issues new shares on large scale.
46 December 2007 PREFERENCE SHARES
Preference shares represent that part of share
capital of a company, which carry preferential
rights and privileges with respect to income
and assets over equity shareholders.
The Indian Companies Act, 1956, describes a
preference share as one, which fulfills two
requirements: (a) With regard to dividends it
carries a preferential right to be paid a fixed
amount, and (b) with regard to capital it carries
a preferential right to be repaid.
The rate of dividend on preference shares is
generally paid at a fixed rate while it is
fluctuating in case of equity shares.
Preference share capital is also refered to as a
hybrid form of finance as it possesses the features
of both ownership capital and borrowed capital.
The important characteristics of preference
Maturity: In respect of maturity, preference shares
resemble equity shares in that the company is
ordinarily not obliged to repay until the
liquidation of the company. Thus, it brings in
permanent capital. Sometimes, preferred shares
are redeemed at a stipulated time as per the terms
of the issue. In such case, these shares would be
redeemed out of the surpluses or by issuing new
preference shares, etc.
Claims on Income: Preferred shareholders have
priority of claim to dividend over equity
shareholders. They are paid dividend at a fixed
rate specified in the agreement. MBA Education & Careers ECO FUNDAS FOR YOU: TYPES OF SHARES
Claims on Assets: Although, no specific assets Merits are pledged against preferred shares, they have a ☞ For risk-averse investors who are interested claim on the general assets of the company. Their in a fixed return, preference shares offer a claims on assets are superior to those of equity good opportunity of investment. shareholders on dissolution of the company. ☞ Preference capital as a source of finance is Preference shareholders are paid their principal more economical as the dividend is paid at amount well before equity shareholders. a fixed rate. When compared to the equity Controlling Power : Generally, preference
shareholders do not have voting power and
hence cannot make any policy decision.
However, they can exercise their rights on
matters relating to them. shares, cost of preference capital is low.
Surplus profits, if any, will go to equity
☞ Preference share capital provides flexibility in the usage of capital. Preference capital
can be repaid when the need for additional In case of cumulative preference shares, if a
company fails to pay dividends for more than
two years and in case of non-cumulative
preference shares, if a company fails to pay
dividend for three years in a total period of
six years, preference shareholders also get
voting power on par with equity shareholders. funds is over while it is not possible in case
of equity share capital.
☞ Both the company and the shareholders stand to gain with the use of preference
☞ As preference capital does not entail voting rights, there is not fear of dilution of control.
Types of Preference Shares
As per the provisions of the Articles of
Association, a company can issue different types
of preference shares as follows:
☞ Cumulative preference shares
☞ Non-cumulative preference shares
☞ Convertible preference shares
☞ Non-convertible preference shares Demerits
☞ The cost of preference capital is lower than equity capital but higher than debt capital.
☞ When the rate of return is less than the cost of preference shares, it creates risk to the
☞ When company fails to pay dividend, preference shareholders would get voting ☞ Redeemable preference shares rights and consequently, the control is ☞ Irredeemable preference shares diluted. ☞ Participating preference shares
☞ Non-participating preference shares ☞ Preference shareholders have no guarantee of receiving dividends every year.
December 2007 47 MBA Education & Careers ECO FUNDAS FOR YOU: TYPES OF SHARES
Deferred shares are generally issued to the
promoters of the company. Therefore, these are
also called promoter’s shares. However, only
independent private companies can alone issue
this type of shares.
A fixed rate of dividend is paid on these shares,
but these shareholders are paid only after all the types of shareholders are paid at the time of
liquidation of the company.
The distinct feature of this type of shares is that
these shareholders enjoy disproportionate voting
rights. The purpose of giving disproportionate
rights is to ensure the existing control of the
management of the company. Therefore, these are
also called “management shares”. M E & C Global Warming: Skeptic vs IPCC
Idea: Evidence that the earth’s temperature
is getting warmer is unclear
Instruments show there has been some
warming of the Earth’s surface since 1979,
but the actual value is subject to large errors.
Most long-term data comes from surface
weather stations. Many of these are in urban
centres which have expanded in both size and
energy use. When these stations observe a
temperature rise, they are simply measuring
the “urban heat island effect”. In addition,
coverage is patchy, with some regions of the
world almost devoid of instruments. Data
going back further than a century or two is
derived from “proxy” indicators such as
tree-rings and stalactites which, again, are
subject to large errors.
Warming is unequivocal. Weather stations,
ocean measurements, decreases in snow
48 December 2007 cover, reductions in Arctic sea ice, longer
growing seasons, balloon measurements,
boreholes and satellites all show results
consistent with the surface record of
warming. The urban heat island effect is real
but small; and it has been studied and
corrected for. Analyses by Nasa for example
use only rural stations to calculate trends.
Recently, work has shown that if you analyse
long-term global temperature rise for windy
days and calm days separately, there is no
difference. If the urban heat island effect
were large, you would expect to see a bigger
trend for calm days when more of the heat
stays in the city. Furthermore, the pattern of
warming globally doesn’t resemble the
pattern of urbanisation, with the greatest
warming seen in the Arctic and northern high
latitudes. Globally, there is a warming trend
of about 0.8C since 1900, more than half of
which has occurred since 1979. ...
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This note was uploaded on 04/11/2010 for the course ECONOMICS HU-203 taught by Professor Hitashi during the Spring '10 term at Punjab Engineering College.
- Spring '10