Types of Shares in India: Explained Simply

A share represents a piece of ownership in a company, meaning the person who holds shares has a stake in how the company runs. 

Companies can have different types or classes of shares, which can give different levels of control, profit-sharing, and rights. According to the Companies Act of 2013, shares in India are mainly divided into two categories: Equity Shares and Preference Shares. 

Each type of share offers its own set of benefits and rules, especially when it comes to voting rights, profits and what happens if the company is ever liquidated. Let’s dive deeper into these two main types of shares and explore what makes them different.

What Are the Different Types of Shares You Should Know About?

When you start investing in the stock market, it’s important to understand the different types of shares available. Here’s a look at the two most common types:

1. Common Shares (Ordinary Equity Shares)

Common shares are the most widely issued and held type of shares in a company. If you own common shares, you essentially own a piece of the company and have the right to vote on important company matters. This includes voting on the board of directors and other main decisions that impact the business. These shares also give you the potential to receive dividends, though they are not guaranteed, and your returns are often tied to the company’s performance. If the company does well, your shares may increase in value, but if it struggles, the value can go down.

2. Preferred Shares (Preference Shares)

Preferred shares offer investors a bit more security compared to common shares. As the name suggests, these shares come with certain advantages. Shareholders with preferred stock usually receive a fixed dividend before common shareholders receive any payout. This means that in times of financial difficulty, preferred shareholders are more likely to get paid first. Additionally, if the company is liquidated, preferred shareholders also have priority over common shareholders when it comes to receiving any remaining assets. However, they usually do not have voting rights, which means they don’t have a say in the company’s decision-making processes.

Types of Ordinary Equity Shares

Equity shares come in different types, each serving a specific purpose based on various factors. Let’s break them down and understand how they are classified. 

Different Types of Equity Shares Based on Capital:

1. Authorised Share Capital

Authorised share capital is the maximum amount a company can raise by issuing equity shares. It’s the total value of shares the company is allowed to offer, as stated in its legal documents. However, the company doesn’t have to raise this full amount.

2. Issued Share Capital

Issued share capital is the actual amount of capital a company raises by issuing a specific number of equity shares to the public. This is the money that investors contribute in exchange for ownership in the company. It represents the portion of authorised share capital that the company has decided to offer to the public.

3. Subscribed Share Capital

Subscribed share capital is the part of the issued share capital that investors have agreed to buy. When shares are issued, investors sign up to purchase them, and that creates the subscribed capital. It’s essentially the portion of the issued capital that has been taken up by buyers.

4. Paid-Up Share Capital

Paid-up share capital is the amount that investors have actually paid for the shares they’ve bought. This is a part of the subscribed capital and shows the actual funds the company has received from shareholders. It represents the money the company can use for its operations and growth.

Other Common Types of Equity Shares

In addition to the above, there are several other types of equity shares including unlisted shares that companies can issue. These shares come with different privileges and serve specific purposes:

1. Bonus Shares

Bonus shares are issued by companies to their existing shareholders without any additional cost. Instead of paying out dividends in cash, the company offers more shares to the shareholders, which basically increasing their holdings. This can be seen as a way to reward loyal investors and distribute profits in the form of additional equity.

2. Rights Shares

Rights shares are offered to existing shareholders, giving them the right (but not the obligation) to buy additional shares at a preferential price, often below the market value. Shareholders are given a limited period to purchase these shares before the offer expires. This is a way for companies to raise capital while giving current shareholders the chance to increase their holdings.

3. Sweat Equity Shares

Sweat equity shares are given to employees or directors of a company in exchange for their hard work, effort, or intellectual contribution. These shares are typically issued to people who have helped the company grow but have not been compensated with cash. Sweat equity shares are a form of recognition and reward for their contributions to the company’s success.

4. ESOPs (Employee Stock Ownership Plans)

ESOPs allow employees to buy shares in the company they work for, often at a discounted price. Employees are typically allowed to hold the shares for a certain period (known as the vesting period) before they can sell them. The idea is that employees will benefit from the growth in the company’s value and share price, aligning their interests with the company’s success.

5. Voting Shares

Voting shares give shareholders the right to vote on important matters concerning the company, such as electing directors or approving mergers. These shares allow investors to have a say in the company’s direction and decision-making processes, making them valuable to those interested in influencing company policies.

6. Non-Voting Shares

Non-voting shares, as the name suggests, do not provide shareholders with voting rights. These shares are typically issued by companies looking to raise capital without giving up control. While non-voting shareholders do not have a say in the company’s decisions, they may still receive dividends and benefit from any appreciation in the stock price.

Different Types of Preference Shares

Preference shares come in various forms, each offering unique benefits and features. Here’s a closer look at some of the most common types:

1. Redeemable vs. Irredeemable Preference Shares

Redeemable preference shares are those where the company has the option to buy back the shares from shareholders at a later date. This can happen either after a specific period or at a predetermined time in the future. The buy-back could be initiated by the company or, in some cases, the shareholder.

On the other hand, irredeemable preference shares don’t offer this buy-back option. Once issued, these shares remain with the shareholder indefinitely unless they are sold or transferred.

2. Convertible vs. Non-convertible Preference Shares

Convertible preference shares give shareholders the option to convert their preference shares into common equity shares under specific conditions. This feature allows the investor to potentially benefit from any increase in the value of the company’s common stock.

Non-convertible preference shares, however, do not come with this option. Shareholders can only receive the fixed dividend and cannot switch their preference shares into common stock.

3. Participating vs. Non-participating Preference Shares

Participating preference shares allow their holders to receive not just the fixed dividend but also a share in the company’s profits once dividends have been paid to common shareholders. This is especially beneficial when the company performs well and has substantial profits to distribute.

On the other hand, non-participating preference shares offer a fixed dividend and nothing more. Shareholders of these shares receive a set payment and don’t participate in additional profits the company might make, regardless of its financial success.

4. Cumulative vs. Non-cumulative Preference Shares

With cumulative preference shares, if the company misses a dividend payment in any given year, the unpaid dividends are carried forward and must be paid out in future years before any dividends can be paid to common shareholders.

Non-cumulative preference shares work differently. If the company skips a dividend payment, the shareholder has no right to claim that missed dividend in future years. The dividend is simply lost, and the shareholder only receives future payments as they become due.

Hierarchy of Common Equity Shares – Class A, B, and C Shares

Many companies divide their stock into different classes—commonly labeled as Class A, Class B, and Class C shares—each offering unique rights and benefits.

• Class A Shares: These often come with the most voting power, giving shareholders greater influence over company decisions. However, they tend to be more expensive and might not always be available to the general public.
• Class B Shares: Typically offered to the public, these shares usually have fewer voting rights than Class A shares but are more affordable and widely accessible.
• Class C Shares: These are often issued to employees as part of their compensation or incentive programs. Class C shares might not carry voting rights but can still be valuable for employees as a financial reward tied to the company’s performance.

Closing Thoughts

Understanding the various types of shares in India is important for anyone looking to invest in the stock market or gain a deeper insight into corporate ownership structures. Each type of share, whether equity or preference, comes with its unique features, rights, and benefits, catering to different investor needs and company goals. By familiarising yourself with these differences, you can make more informed decisions that align with your financial objectives and risk appetite. Whether you’re a seasoned investor or just starting, knowing how shares work is the first step toward building a successful investment portfolio.