Business Laws and Ethics · Rights of Shareholders

Types of Shares and Rights Attached under Companies Act 2013

Updated 10 October 2026 · Fact-checked

Under Section 43 of the Companies Act, 2013, a company limited by shares has two kinds of share capital: equity and preference. Preference shares carry a preferential right to dividend and to repayment of capital on winding up. Equity is all share capital that is not preference. To answer, classify the share, then state its rights.

Understand Types of Shares and Rights Attached

A company raises money by issuing shares. Each share is a unit of ownership. Not all shares carry the same rights, so the Act sorts them into classes.

Section 43 says the share capital of a company limited by shares is of two kinds: equity share capital and preference share capital. Equity share capital can be (i) with voting rights, or (ii) with differential rights as to dividend, voting or otherwise, in accordance with prescribed rules. The Act defines equity by exclusion: it means all share capital which is not preference share capital.

Preference share capital is that part of issued capital which carries or would carry a preferential right as to two things: (a) payment of dividend, either as a fixed amount or at a fixed rate, and (b) repayment of the paid-up amount on winding up or repayment of capital. Both rights together define the class. A share with only one of them is not covered by this definition.

A preference share does not stop being preference just because it also participates. The Explanation says capital is still preference capital even if it also has a right to share with other capital in dividends (participating in dividend), or to share in surplus after all capital is repaid on winding up. So participating preference shares are still preference shares.

The rights follow from the class. Preference holders come first for a fixed dividend and for capital return. Equity holders carry the residual risk, but they have a vote on every resolution and share in the remaining profits. Voting differs sharply between classes under Section 47, and redemption of preference shares is governed by Section 55.

Key rules to remember

Two kinds of share capital (Section 43): Share capital = Equity share capital + Preference share capital; Applies to a company limited by shares. Equity = all share capital that is not preference.
Test for preference share capital: Preferential right to (a) dividend at a fixed amount or rate AND (b) repayment of capital on winding up or repayment of capital; Participation in extra dividend or surplus does not take away the preference character.
Equity voting (Section 47(1)): Equity member: right to vote on every resolution; poll vote in proportion to share in paid-up equity share capital; Subject to Sections 43, 50(2) and 188(1).
Preference voting (Section 47(2)): Vote only on resolutions that directly affect rights of those preference shares, or winding up, or repayment/reduction of equity or preference capital; If dividend on a class is unpaid for two years or more, that class can vote on all resolutions.
Redemption of preference shares (Section 55): No irredeemable preference shares; redeemable within 20 years (longer for infrastructure projects as prescribed); must be fully paid; Redeem only out of divisible profits or proceeds of a fresh issue; if out of profits, transfer an equal sum to Capital Redemption Reserve.
Sweat equity (Section 54): Special resolution + class already issued; ranks pari passu with other equity shares; The resolution must specify number of shares, current market price, consideration and class of directors or employees.

How to solve Types of Shares and Rights Attached questions

Use this order for any question on classes of shares and their rights.

1Identify the company type. Section 43 applies to a company limited by shares.
2Classify the share: preference only if it has a preferential right to both dividend (fixed amount or rate) and capital repayment. Otherwise it is equity.
3If the question mentions extra features (participation, differential rights, sweat equity), say where they sit. Participating preference is still preference. Differential rights and sweat equity are equity.
4State the rights asked for: dividend, repayment of capital on winding up, and voting.
5For voting, apply Section 47: equity votes on every resolution; preference votes only in the cases listed, unless dividend is unpaid for two years or more.
6For redemption, apply Section 55: no irredeemable shares, 20-year limit, fully paid, source of funds, CRR.
7Conclude with a one-line answer tied to the section number.

Quickest way: Two-question classification

When to use it: For MCQs and short case questions asking which class a share belongs to or what a holder can do.

Ask: does it have a preferential right to dividend AND to capital return? Yes = preference; no = equity.
Ask: what is being voted on? Equity = anything. Preference = only own rights, winding up, or capital repayment/reduction.
Check for the trap: two years of unpaid preference dividend gives that class a vote on all resolutions.
For redemption questions, look for the red flags: irredeemable, not fully paid, over 20 years, wrong source of funds.

Common mistakes in Types of Shares and Rights Attached

Saying preference shareholders can never vote.
Students remember that preference shares are non-voting in practice.
Fix: State Section 47(2): they vote on resolutions directly affecting their rights, winding up, and repayment or reduction of capital, and on all resolutions if dividend is unpaid for two years or more.
Treating a participating preference share as equity.
The share gets extra dividend, which looks like equity.
Fix: Section 43 Explanation (iii): capital stays preference even if it participates in dividend or in surplus on winding up.
Calling a share preference because it has only a fixed dividend.
Students recall only one of the two rights.
Fix: Both preferential rights, dividend and capital repayment, define preference share capital.
Allowing irredeemable preference shares or redemption beyond 20 years.
Older law and practice allowed it.
Fix: Section 55(1) bars irredeemable preference shares. Redemption must be within 20 years, with a longer period only for infrastructure projects as prescribed.
Redeeming partly paid preference shares or using any reserve.
Students overlook the proviso conditions.
Fix: Shares must be fully paid and redeemed only from profits available for dividend or a fresh issue; profit-funded redemption needs a transfer to Capital Redemption Reserve equal to nominal value.
Thinking sweat equity is a separate kind of capital with fewer rights.
The name suggests a special class.
Fix: Section 54(2): sweat equity shares carry equity rights and rank pari passu with other equity shareholders.

Worked examples

Example 1

Arjun Textiles Ltd has 10% cumulative preference shares which also share in surplus assets after all capital is repaid on winding up. Are these preference or equity shares? State the rights of the holders on dividend and capital.

Show the solution

Section 43 Explanation (ii): preference capital carries a preferential right to dividend at a fixed amount or rate and to repayment of capital on winding up.
The 10% rate is a fixed-rate dividend, so the dividend right is preferential.
Priority return of paid-up capital on winding up is the capital right. This is assumed here, as the shares are described as preference shares sharing in surplus after all capital is repaid.
Explanation (iii)(b): the extra right to share in surplus after all capital is repaid does not change the character.
Rights: fixed 10% dividend before equity, repayment of capital before equity on winding up, plus participation in surplus.

Answer: They are preference shares. Holders get a fixed 10% dividend and repayment of capital ahead of equity, and also share in surplus on winding up, without losing preference status (Section 43).

Example 2

Mehta Foods Ltd has not paid dividend on its preference shares for the last two years. At the next general meeting, a resolution is proposed to appoint a new auditor. Can the preference shareholders vote?

Show the solution

Section 47(2): preference holders normally vote only on resolutions directly affecting their rights, winding up, or repayment or reduction of capital.
Appointing an auditor does not fall in those categories, so ordinarily they could not vote.
Second proviso to Section 47(2): where dividend on a class of preference shares is unpaid for two years or more, that class can vote on all resolutions.
Dividend has been unpaid for two years, so the exception applies.
Their poll vote is in proportion to their share in the paid-up preference share capital.

Answer: Yes. Because dividend has been unpaid for two years, the preference shareholders can vote on all resolutions, including the auditor resolution.

Exam tips

Write the section number with each rule: 43 for kinds, 47 for voting, 48 for variation, 54 for sweat equity, 55 for redemption.
For difference questions, use a two-column comparison on dividend, capital repayment, voting, redemption and risk.
In MCQs, look for the exceptions: two years of unpaid dividend, participating preference, and fully paid condition for redemption.
In written answers, define first, then give rights, then the exception. This pattern earns step marks.
If a question asks about changing class rights, link to Section 48 and note the three-fourths consent.

Practice questions from Rights of Shareholders

Types of Shares and Rights Attached: frequently asked questions

What are the types of shares under the Companies Act, 2013?

Section 43 provides two kinds of share capital for a company limited by shares: equity and preference. Equity can have voting rights or differential rights as to dividend, voting or otherwise. Preference carries preferential rights to dividend and capital repayment.

What is the main difference between equity and preference shares?

Preference shares have a preferential right to a fixed dividend and to repayment of capital on winding up. Equity shares are all capital that is not preference. Equity holders vote on every resolution, while preference holders vote only in limited cases.

Can a company issue irredeemable preference shares?

No. Section 55(1) bars a company limited by shares from issuing irredeemable preference shares. Redeemable ones must be redeemed within 20 years, with a longer period allowed for infrastructure projects subject to prescribed conditions.

Do sweat equity shares have different rights from equity shares?

No. Section 54(2) says the rights and restrictions applicable to equity shares apply to sweat equity shares. Their holders rank pari passu with other equity shareholders.