The Companies Act, 2013, is a comprehensive legal framework that governs corporate entities in India. Among its many provisions, Section 43 plays a crucial role in defining the different types of share capital a company limited by shares can issue. Share capital represents the ownership structure of a company and is fundamental to raising capital, attracting investors, and ensuring compliance with legal and regulatory requirements.
Section 43 outlines two primary categories of share capital that companies limited by shares can issue:
- Equity Share Capital
- Preference Share Capital
Each category has specific features, rights, and regulatory requirements that companies must adhere to while issuing shares.
1. Equity Share Capital
Equity share capital represents the primary ownership in a company. Equity shareholders are considered owners of the company and have voting rights, enabling them to participate in decision-making processes such as appointing directors, approving mergers, and determining corporate policies.
Types of Equity Share Capital
As per Section 43, equity share capital is divided into two subcategories:
(A) Equity Shares with Voting Rights
- These shares provide shareholders with the right to vote on important company matters.
- Voting rights are typically proportional to the number of shares held (one share = one vote).
- Equity shareholders receive dividends based on the company’s performance and only after preference shareholders have been paid.
- They also bear the highest risk, as they are the last to be paid in case of liquidation.
(B) Equity Shares with Differential Rights
- These shares have varying rights concerning dividends, voting, or other benefits as per the company’s Articles of Association.
- Some companies issue shares with higher dividends but limited or no voting rights.
- This structure enables promoters and founders to raise capital without diluting their control over the company.
- The Companies (Share Capital and Debentures) Rules, 2014, state that shares with differential voting rights must not exceed 26% of the total paid-up equity share capital of a company at any given time.
Significance of Equity Share Capital
- Equity shares empower shareholders by granting them voting rights in corporate decisions.
- They provide companies with long-term financing as equity capital is not required to be repaid like debt capital.
- They offer investors the potential for high returns, as equity shareholders benefit from company growth.
However, equity shareholders also face greater financial risks, as their returns depend on the company’s profitability, and they receive payouts only after other obligations (such as debt and preference share dividends) have been met.
2. Preference Share Capital
Preference shares, as the name suggests, grant preferential rights over equity shares in two key aspects:
- Dividends: Preference shareholders receive fixed dividends before any dividend is paid to equity shareholders.
- Capital Repayment: In case of liquidation, preference shareholders have a higher claim on company assets than equity shareholders.
Types of Preference Share Capital
(A) Cumulative vs. Non-Cumulative Preference Shares
- Cumulative Preference Shares: If the company skips dividend payments in a given year, these unpaid dividends accumulate and must be paid before dividends are distributed to equity shareholders.
- Non-Cumulative Preference Shares: If the company fails to declare dividends in a particular year, preference shareholders lose the right to claim it later.
(B) Participating vs. Non-Participating Preference Shares
- Participating Preference Shares: These shareholders have the right to receive additional profits if the company performs exceptionally well after paying dividends to equity shareholders.
- Non-Participating Preference Shares: These shareholders only receive fixed dividends and do not participate in extra profits.
(C) Redeemable vs. Irredeemable Preference Shares
- Redeemable Preference Shares: These are issued with a fixed maturity period, after which the company buys them back.
- Irredeemable Preference Shares: These shares do not have a fixed repayment date and remain active unless the company is liquidated.
Regulations on Preference Shares
The Companies Act, 2013, restricts the issuance of irredeemable preference shares. Redeemable preference shares must be redeemed within 20 years from their issue date, except in specific cases like infrastructure projects.
Regulatory Framework and Compliance Requirements
The issuance of shares, especially those with differential rights, is governed by the Companies (Share Capital and Debentures) Rules, 2014. Companies must adhere to these compliance requirements to ensure transparency and protect investor interests.
Some key compliance requirements include:
- Approval from Shareholders and Board of Directors:
- Companies must obtain approval from shareholders via a special resolution in a general meeting before issuing shares with differential voting rights.
- Minimum Track Record Requirements:
- Companies issuing shares with differential voting rights must have been profitable in the past three years and must not have defaulted on dividend payments, statutory dues, or loan repayments.
- Restrictions on Issuance:
- Companies cannot issue differential voting shares if they have defaulted on payment of dividends, statutory dues, or loans.
- Listing and Disclosure Requirements:
- If a company is publicly listed, it must comply with SEBI regulations for listing equity and preference shares on stock exchanges.
Failure to comply with these regulations can result in penalties, legal consequences, and restrictions on future capital raising activities.
Challenges and Considerations
While Section 43 provides flexibility for companies in structuring their share capital, certain challenges arise:
- Complexity in Issuing Differential Voting Shares:
- Due to regulatory requirements and restrictions, many companies prefer traditional equity shares over differential voting shares.
- Preference Shares Have Limited Market Appeal:
- Investors often prefer equity shares due to their potential for high returns, while preference shares provide fixed dividends but limited capital appreciation.
- Regulatory and Compliance Burdens:
- Companies must invest heavily in legal and financial compliance to ensure proper governance while issuing different classes of shares.
- Risk for Minority Shareholders:
- Issuing shares with differential voting rights can sometimes lead to control being concentrated in the hands of a few, which may be detrimental to minority shareholders.
Conclusion
Section 43 of the Companies Act, 2013, plays a crucial role in defining the structure of share capital in Indian companies. By classifying share capital into equity shares and preference shares, it provides companies with a framework to raise capital effectively while maintaining transparency and protecting investor interests.
While equity shares offer higher returns and voting rights, preference shares provide stability and fixed dividends. Companies must carefully consider their capital structure and regulatory requirements to balance growth, investor confidence, and corporate governance.
In a dynamic business environment, companies must continue adapting to market trends and legal frameworks to ensure compliance and sustainable growth while protecting shareholders’ interests.
