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Difference between Equity Shares and Preference Shares | Equity Shares vs Preference Shares

Difference Between Equity Shares and Preference Shares

Types of Shares

A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietary relationship between the company and the shareholder. A shareholder is the proportionate owner of the company.

Section 2(84) defines a share as, “A share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied”.

An exhaustive definition of share has been given by Farwell J. in Borland’s trustee v. steel bros. in the following words: “A share is the interest of a shareholder in the company, measured by a sum of money, for the purpose of liability in the first place, and of interest the second, but also consisting of a series of mutual covenants entered into by all the shareholder inter se in accordance with the companies act”.

Thus a share

i) Measures the right of a shareholder to receive a certain proportion of the profits of the company while it is a going concern and to contribute to the assets of the company when it is being wound up; and

ii) Forms the basis of the mutual covenants contained in the articles binding the shareholders inter se.

Equity Shares vs Preference Shares

Equity Shares Meaning

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.

Preference Shares Meaning

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.

Difference between Preference Share and Equity Share are given below:

Basis of Difference

Preference Share

Equity Share

Right of Dividend

Preference shares are paid dividend before the Equity shares.

Equity shares are paid dividend out of the balance of profit available after the dividend paid to preference shareholders.

Rate of Dividend

Rate of dividend is fixed.

Rate of dividend is decided by the Board of Directors, year to year depending on profits.

Convertibility

Preference Shares may be converted into Equity shares, if the terms of issue provide so.

Equity shares are not convertible.

Participation in Management

Preference shareholders do not have the right to participate in the management of the company.

Equity shareholders have the right to participate in the management of the company.

Voting Right

Preference shareholders do not carry the voting right except in special cases.

Equity shareholders have voting rights in all circumstances.

Redemption of Share Capital

Preference shares may be redeemed.

A company may buy-back its equity shares.

Refund of Capital

At the time of winding up of the company, preference share capital is paid before the payment of Equity share capital.

On winding up, Equity Share capital is repaid after preference share capital is paid.

Conclusion: After Going Through this article, you will clearly understand the difference between equity shares and preference shares. Also read our comprehensive article on preference shares which include: (Coming Soon)

a) Meaning of Preference shares

b) Types of Preference shares

c) Features of Preference shares

d) Preference Shares: Advantages and Disadvantages

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