Companies Act Section 43 — Kinds of share capital
CHAPTER IV SHARE CAPITAL AND DEBENTURES
Commercial / Corporate
Summary
The share capital of a company limited by shares must be of two kinds: equity share capital and preference share capital.
Under clause (a), equity share capital can be of two types. The first is equity shares with voting rights. The second is equity shares with differential rights, meaning rights that differ from normal shares in terms of dividend, voting, or other matters, as per rules that may be prescribed.
Under clause (b), the other kind is preference share capital. However, a proviso states that this Act does not affect the rights of preference shareholders who were entitled to participate in the proceeds of winding up before this Act came into force.
The Explanation defines key terms. Under clause (i) of the Explanation, equity share capital means all share capital that is not preference share capital.
Under clause (ii) of the Explanation, preference share capital means that part of the issued share capital which carries a preferential right regarding two matters. First, under sub-clause (a), payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may be free of or subject to income-tax. Second, under sub-clause (b), repayment, in the case of winding up or repayment of capital, of the amount of share capital paid-up or deemed to have been paid-up, whether or not there is a preferential right to payment of any fixed premium or premium on a fixed scale, as specified in the memorandum or articles of the company.
Under clause (iii) of the Explanation, capital is still deemed to be preference capital even if it has additional rights. Under sub-clause (a), this includes a right to participate, fully or to a limited extent, with non-preferential capital in dividends, in addition to the preferential dividend amounts. Under sub-clause (b), this includes a right to participate, fully or to a limited extent, with non-preferential capital in any surplus remaining after the entire capital has been repaid on winding up, in addition to the preferential repayment right.
Official Text
The share capital of a company limited by shares shall be of two kinds, namely:—
(a) equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and
(b) preference share capital:
Provided that nothing contained in this Act shall affect the rights of the preference share holders who are entitled to participate in the proceeds of winding up before the commencement of this Act.
Explanation.—For the purposes of this section,—
(i) “equity share capital”, with reference to any company limited by shares, means all share capital which is not preference share capital;
(ii) “preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;
(iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:—
(a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.