The Difference Between Equity Shares and Preference Shares of a Company

Investments are important in today’s uncertain age. You can not depend on a single source of income for fulfilling your needs. Everybody should invest in something to gain an additional income. If you want to make an investment in the shares of the company, then before purchasing you should be informed about the types of shares and the difference between them. If you make an uninformed investment, there are good chances that you might face losses from your investment. There are two types of Difference Between Equity Shares and Preference Shares of a Company. Now let’s know about them in detail.

Preference Shares

Preference shares are the types of shares that are given preference over the equity shares while providing dividends to the shareholders and during the liquidation of the company or redemption of shares. The preference shareholders receive a dividend at a fixed rate already specified on the share certificates. Unlike equity shareholders, the preference shareholders are not considered the owners of the company. 

The word “preference” clearly shows that the preference shareholders are given preference at the time of the liquidation of the company and while the payment of dividends and thus are called “preference shares”. The preference shareholders are given a preference in liquidation and payments but unlike the equity shareholders, they do not enjoy any voting rights in the meetings and other important decisions of the company. In the case of liquidation of the company, firstly, the creditors are repaid and then the preference shareholders. The equity shareholders are the last ones to be repaid. The preference shareholders are also given arrears if the dividend for any previous year is not provided to the shareholders. 

Types of Preference Shares

• Participating Preference Shares/ Non-Participating Preference Shares
• Convertible Preference Shares/ Non-Convertible Preference Shares
• Cumulative Preference Shares/ Non-Cumulative Preference Share

Equity Shares

Also termed as ‘General Shares’, equity shares are considered a part of the total capital of the company. The equity shareholders are called the owners of the company. Equity shares are the type of share that is not given any preference during the liquidation of the company or while payment of dividends. The rate of dividend of the equity shareholders is not fixed. There may be times where such shareholders may not get any dividend at all. The dividend provided depends upon the profit earned by the company. The decision of rate and amount of dividend is decided by the directors of the company. Unlike the preference shareholders, the equity shareholders have the right to vote in the general and special meetings of the company. They also have the right to appoint or remove any director or auditor of the company. 

Types of Equity Shares

• Sweat Equity Share
• Authorized Share Capital
• Issued Share Capital
• Subscribed Share Capital
• Paid-up Capital
• Rights Share
• Bonus Share

Read Also :- Shares and Debentures: Similarities & Dissimilarities

Difference Between Preference Shares and Equity Shares

Conclusion

While making an investment, you can choose between preference shares and equity shares according to your needs. If you want a stable income from investment then you should opt for preference shares but if you want to be an owner in a company, then you should invest in equity shares. Other features of the types of shares should also be kept in mind before making an investment and an informed decision should be taken thereafter. 

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What All You Must Know About The Allotment of Preference Shares?

Preference Shares

Shareholders have percentage ownership in the profits of the company and if talking about Preference Shareholders, they are the ones who are paid before the regular shareholders at the time of maturity. 

As per Explanation (ii) section, 142 of Companies Act 2013, Preference Shares are a part of the company’s capital, the owners of which are preferred over others when it comes to payment of dividends (fixed amount or rate) or at the time of repayment of shares when the company is permanently winding up. 

As per Explanation (ii) section 142 of Companies Act 2013, the category of shares showing any of the below-mentioned characteristics are considered to be preferential shares: 

• Preference shareholders have the right to own the normal shares in a certain amount. 
• While dividend payout preference shareholders are allowed to participate (fully or partially) in the distribution of surplus profit of the company. 
• Preference shareholders are paid the first whenever the company decides to disperse the profits. 

Read Also: Preference Shares and Its Different Types?

Sub-Categories of Preferential Shares

There are a total eight kinds of preferential shares allotted to the shareholders as per their choices and availability in the share market. They are different from each other but share one common characteristic and that is they all are paid before ‘Equity Shares’. 

• Cumulative: Annual payment (at fixed rates). If the company fails to pay then the liability adds on to the next year’s liability.  
• Non-cumulative: Annual payment (at fixed rates). If the company fails to pay in the current year liability shall not be carried to the next year.  
• Redeemable: These shares can be redeemed either after a specific period or after giving due notice (by the shareholder). 
• Non-Redeemable: These cannot be redeemed under any situation until the maturity (at the time of winding up). 
• Convertible: Such preference shares could anytime be converted into Equity Shares (under special circumstances). 
• Non-convertible: Such preference shares cannot be converted into any other kind of shares anytime. 
• Participating: Such shareholders have the right to participate in the company’s additional profits.  
• Non-Participating: Such shares provide no additional profit if the company has gained a surplus.

Who Can Avail of The Preference Shares in The Company?

• Existing Equity Shareholders. 
• Employees of the company
• Shares acquired via Private Placement of Shares.

Conditions For Preferential Allotment Of Shares

• The offer of shares has to be approved by the shareholders of the company. 
• Article of Association should issue shares through PAS.
• A company could offer the shares through a Private Placement Offer Letter to not more than 200 people. They can be individuals or any entity. 
• Finalising the ultimate achievers of the shares and the percentage offered to them.
• Allotment of preference shares takes around 12 months from the date of passing a special resolution. 
• The issuer company prepares an Offer letter in form PAS-4 and prepares PAS 5 for maintaining the records. The value of the offer made by the company should not be less than 20,000 (security face value). 
• The price of shares shall be determined as the price mentioned in the valuation report of the registered valuer. 
• With the offer letter, there is an application that has ab serial number and address of the person to whom shares are granted. 
• Till the allotment procedure is going on, the grant of any other share or security type is restricted. No invitation will be sent to the shareholder of any other kind of share purchase.   
• Payment for share allotment shall be done only via bank accounts. The shareholder must deposit the money in the company’s bank account that is especially for security money transactions (or repayment for securities).  
• Companies can not make share offers through advertisements or on social media (no right to inform the public on a large scale). 
• There is no limitation on a number of shares to be allotted to the shareholder in an FY. 

Process For Issuing Preference Shares

• Board meetings shall be held by the company and the approval of offer letter for preference shares having the name of the person to whom shares are allotted. 
• An explanatory statement containing a number of shares, nature, objective, price, current shareholding pattern, rate of dividend and other terms of allotment. 
• The company holding EGM - for presenting the prepared PAS-04 (offer letter) and pass the special resolution in front of board members. 
• Dispersing the offer letters accompanied by the application (either by a hard copy or electronic modes). 
• The company shall file SH-7 and MGT-14 with the registrar within 30 days of passing the special resolution. 
• Explanatory Statement, details of GM, duration of GM and certified true copy of Special Resolution (attachments with the forms). 
• Opening separate bank accounts for the transaction of securities. 
• Conducting a board meeting after allotment money is received. Issue notice of board meeting to all board members along with the agenda of the board meeting. 
• In the board meeting present the final list of allottees, board resolution for Allotment of Shares, pass a resolution for issuing Share Certificate, authorized persons to sign the share certificates. 
• The company must file PAS 3 with the registrar of companies along with documents such as a list of allottees, board resolution for allotment of shares.
• Dispersing Share Certificates in Form SH-1 two months from the date of allotment of shares. 
• Maintain a register of the members as mentioned U/S 88 of Companies Act 2013. 

Redeeming the Preference Shares

• There should be no balance in the payment for preference shares. 
• A company can redeem its shares only after a certain period, the company’s options or after due notice given by the shareholders, or at maturity. 
• CRR should be presented. 

Procedure to Redeem The Preference Shares

• Meeting of Board of Directors (issuing the notice 7 days before the board meeting is scheduled + agenda of the meeting)
• Passing Board Resolution related to Redemption of Preference Shares. 
• Present letter of redemption in the board meeting. 
• The company must file SH-7 within 30 days of passing the Resolution with a certified copy of the resolution.  

Read Also: Equity Shares: Classification, Benefits & Drawbacks

When Shares Cannot be Redeemed

• If the company is not able to redeem the shares or is unable to pay the shareholder then it is possible for the issuing company to replace the issue. 
• Redemption of preference shares by issuing new preference shares can be done only after the approval of the Preference Shareholders (at least 75% of the stakeholders should be in favor of the decision). 
• The Tribunal thereon orders the company to immediately redeem the preference shares of the shareholders who are showing their disapproval to the decision of the company. 

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Know About Types and Difference Between Equity and Preference Shares

Before going over the difference between equity and preference shares lets understand the meaning of shares. Funds are required for running any business whether big or small. There are a lot of sources in the market from which an individual can raise funds for the business. Share is a source of raising funds for the fulfillment of day to day or other types of requirements of a company. 

Share is a part of equity if a company. It denotes the ownership of a company. If you own 10% shares of a company it means that you own 10% of the company. The rate of shares keeps fluctuating according to the demand in the market. 

There are two Types of Shares Equity Shares and Preference Shares. Both are similar in a lot of ways but have some characteristic differences that separate them from each other. 

Read Also: Equity Shares: Classification, Benefits & Drawbacks

Equity Shares:

The word shares are often referred to the equity shares. When people say shares they generally mean equity shares. Equity shares provide a part of ownership in a company thus involves a lot of risks. 

Dividends received by the Equity Shareholders depend upon the total profit earned by the company so it is possible that equity shareholders may not get any dividend if the company has insufficient profits at its disposal.

Preference Shares:

The preference shareholders are given preference over the equity shareholders when provided dividend by the company. The preference shareholders are given a fixed percentage of dividends despite the change in the profits of the company. The percent of dividend is pre-decided and written on the preference share agreement. 

Difference Between Equity and Preference Shares:

• Rate of Dividend

The rate of dividend received by the preference shareholders is fixed unlike that of equity shareholders as equity shareholders receive dividends according to the profits earned by the company.

• Issue of Shares

It is mandatory to issue equity shares through Initial Public Offer while the issuance of preference shares depends upon the wishes of the company.

• Trade

Equity shares can be traded in the share market easily while the preference shares can not. Thus there is no change in the face value of preference shares over time.

• Types of Shares

There are different types of preference shares like participating preference shares, convertible preference shares, etc. but there is only one type of equity share.

• Price

The price of preference shares is higher than that of equity shares which means it can not be afforded by everybody.

• Handling while Liquidation

The preference shareholders are paid before the payments of equity shareholders in case of liquidation of the company.

• Repayment

The preference shareholders are repaid by the company after a fixed period of time while the equity shareholders may or may not get repaid.

• Voting Rights

The equity shareholders enjoy the right to vote in the AGMs and GMs of a company, but the preference shareholders are not given the right to vote.

• Bonus Shares

The equity shareholders can easily claim bonus shares, unlike the preference shareholders. 

• Dividend

If the preference shareholders are not given dividends for a year then it gets accumulated in the next year, while equity shareholders may or may not receive a dividend for any year. 

• Conversion

The preference shares can be converted into equity shares but equity shares can not be converted. 

Read Also: Shares and Debentures: Similarities & Dissimilarities

Both types of shares have their own benefits. It totally depends on the needs of an individual, which one does he want to purchase.

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