Company Law and Practice · Share and Share Capital - Concepts

Equity Shares and Preference Shares: Rights and Types

Updated 11 October 2026 · Fact-checked

Under Section 43, share capital of a company limited by shares is equity or preference. Preference shares carry a preferential right to a fixed dividend and to return of capital on winding up. Equity is all other share capital. To solve questions, identify the class, then apply voting (Section 47) and redemption (Section 55) rules.

Understand Equity Shares and Preference Shares

A company limited by shares can raise share capital in two kinds. Section 43 says they are equity share capital and preference share capital. Equity may carry voting rights, or differential rights as to dividend, voting or otherwise, as per prescribed rules.

Preference share capital is the part of issued capital that carries a preferential right in two things: payment of dividend (a fixed amount or at a fixed rate) and repayment of capital on winding up or repayment of capital. The Act defines equity by exclusion. Under Section 43, Explanation (i), equity share capital means all share capital which is not preference capital.

Preference capital stays preference even if it also participates. If it has a right to share further in dividends with equity, or in surplus after all capital is repaid, it is still preference capital. This is the basis of participating preference shares.

The usual types of preference shares are:

Cumulative: unpaid dividend in a year with no profits is carried forward and paid before equity gets anything later.
Non-cumulative: unpaid dividend lapses.
Redeemable: company repays them after a period or on a fixed event.
Convertible: can be converted into equity shares on stated terms.
Participating: share in surplus profits or surplus assets along with equity, beyond the fixed preferential amount.

Voting is the key difference. Equity members vote on every resolution, and on a poll their vote is in proportion to their share of paid-up equity capital. Preference holders vote only on limited matters. After two years of unpaid dividend on a class, that class votes on all resolutions.

Preference shares are still shares, not debt. Holders are members and get dividend only out of profits. Debenture holders are creditors who get interest whether or not there is profit. This is the usual way to differentiate them.

Key rules to remember

Kinds of share capital (Section 43): Share capital = Equity share capital + Preference share capital; Equity means all share capital which is not preference capital. Equity may be with voting rights or with differential rights as to dividend, voting or otherwise under prescribed rules.
Test for preference capital: Preference = preferential right to dividend (fixed amount or fixed rate) AND preferential right to repayment of capital; Carrying both rights makes it preference, even if it also participates in extra dividend or surplus assets. Equity share capital means all share capital which is not preference capital (Section 43, Explanation (i)).
Voting of equity members (Section 47(1)): Right to vote on every resolution; poll vote ∝ share in paid-up equity capital; Subject to sections 43, 50(2) and 188(1). Applies to members of a company limited by shares holding equity.
Voting of preference members (Section 47(2)): Vote only on resolutions directly affecting rights of those shares, or for winding up, or repayment/reduction of equity or preference capital; Poll vote is in proportion to share in paid-up preference capital.
Arrears rule (proviso to Section 47(2)): Dividend unpaid for 2 years or more on a class ⇒ that class votes on all resolutions; The rule is for that class whose dividend is unpaid.
Redemption of preference shares (Section 55): No irredeemable preference shares; redeemable within 20 years of issue; fully paid; out of profits available for dividend or fresh issue proceeds; premium on redemption provided for before redemption; Authorisation by articles is required. Infrastructure projects may exceed twenty years, subject to prescribed annual redemption at holders' option. Under Section 55(2)(d), for the prescribed class of companies whose financial statements comply with the accounting standards under section 133, the premium must be provided for out of profits before redemption. In other cases it may be provided for out of profits or the securities premium account (also Section 52(2)(d)).
Capital Redemption Reserve (Section 55(2)(c)): CRR = nominal amount of shares redeemed out of profits; Transfer is needed only when redeeming out of profits, not out of a fresh issue. CRR can be used to issue fully paid bonus shares.
Filing on redemption (Section 64): Notice to Registrar within 30 days of redemption, with altered memorandum; Default penalty is ₹500 per day, up to ₹5,00,000 for the company and ₹1,00,000 for an officer in default.

How to solve Equity Shares and Preference Shares questions

Use this order for any question on equity and preference shares, whether it is a short note, a difference question or a case study.

1Identify the class of share from the facts: does it carry a preferential right to dividend and to return of capital? If yes, it is preference. If not, equity.
2Name the sub-type if asked: cumulative, non-cumulative, redeemable, convertible or participating. Define each in one line.
3State the governing section: Section 43 for kinds, Section 47 for voting, Section 55 for redemption.
4Apply the rule to the facts. For voting, check the resolution type and whether dividend is unpaid for two years or more on that class.
5For redemption, check the conditions in order: authorised by articles, fully paid, within 20 years, source of funds, CRR, premium.
6Check the filing duty: notice to the Registrar within 30 days under Section 64.
7Close with a one-line conclusion that answers the exact question asked.

Quickest way: Two-question shortcut

When to use it: Use when time is short and the question asks whether preference holders can vote or whether a redemption is valid.

For voting, ask: is it a limited-matter resolution, or has the class gone two years without dividend? If neither, no vote.
For redemption, tick five points: articles authorise, fully paid, within 20 years, source is profits available for dividend or a fresh issue, and any premium on redemption is provided for before redemption (Section 55(2)(d)).
Then add the CRR point only if redemption is out of profits: transfer the nominal amount of the shares redeemed to CRR. If redemption is out of a fresh issue, no CRR transfer is needed.
If any tick fails, the redemption is not valid as proposed. Name the failed condition.
Write the section number next to each point to earn marks.

Common mistakes in Equity Shares and Preference Shares

Saying preference shareholders have no voting rights at all.
Students remember that preference holders are not the owners in the ordinary sense.
Fix: State they vote on resolutions directly affecting their rights, winding up, and repayment or reduction of capital. Add the two-year arrears rule.
Treating participating preference shares as equity.
The right to share in surplus looks like an equity feature.
Fix: Remember Section 43 keeps such capital as preference if it has the preferential rights, even with a right to participate.
Allowing irredeemable preference shares.
Older law allowed them, and students carry that idea forward.
Fix: Section 55(1) bars irredeemable preference shares. They must be redeemable within 20 years, with the infrastructure exception.
Making a CRR transfer even when redeeming from a fresh issue.
Students memorise CRR as always needed.
Fix: CRR is required only when redemption is out of profits. Redemption out of fresh issue proceeds needs no transfer.
Calling preference shares debentures because both have a fixed return.
Fixed rate looks like interest.
Fix: Preference holders are members paid dividend only from profits. Debenture holders are creditors paid interest regardless of profit.
Forgetting the Registrar filing after redemption.
Students stop at the accounting entry.
Fix: Add notice to the Registrar within 30 days under Section 64, with the altered memorandum.

Worked examples

Example 1

Kaveri Textiles Ltd has issued 10% preference shares. It has not paid the dividend on them for the last two years. A resolution to appoint a new auditor is placed before the general meeting. Can the preference shareholders vote on it?

Show the solution

Provision: under Section 47(2), preference holders 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 in the ordinary case they could not vote.
The second proviso to Section 47(2) says that where dividend on a class of preference shares has not been paid for two years or more, that class has a right to vote on all resolutions.
Facts: dividend has been unpaid for two years, so the condition is met.

Answer: Yes. The preference shareholders of that class can vote on the auditor resolution, because dividend on their class has been unpaid for two years or more (Section 47(2), second proviso).

Example 2

Arjun Industries Ltd, authorised by its articles, plans to redeem at par 5,000 fully paid 8% preference shares of ₹100 each out of profits available for dividend. No fresh issue is made. What amount must be transferred to Capital Redemption Reserve, and what must the company file?

Show the solution

Check conditions under Section 55: articles authorise, shares are fully paid, and redemption is out of profits otherwise available for dividend. These are met. Redemption is at par, so there is no premium to provide for under Section 55(2)(d).
Redemption is out of profits, so Section 55(2)(c) requires a transfer equal to the nominal amount of shares redeemed.
Nominal amount = 5,000 × ₹100 = ₹5,00,000.
Under Section 64(1)(c), the company must file a notice with the Registrar within 30 days of redemption, along with an altered memorandum.

Answer: The company must transfer ₹5,00,000 from profits to the Capital Redemption Reserve Account. It must file notice with the Registrar within 30 days of redemption.

Exam tips

Write the definition from Section 43 first. Examiners reward the two-part test for preference capital.
For a difference question, use clear points: dividend, voting, return of capital, nature of holder and redemption.
In voting questions, always state the two-year arrears rule. It is the most tested exception.
In redemption problems, list the Section 55 conditions in order and compute the CRR amount with working.
End every answer with a one-line conclusion in ICSI style: provision, analysis, conclusion.

Practice questions from Share and Share Capital - Concepts

Equity Shares and Preference Shares in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Equity Shares and Preference Shares: frequently asked questions

What are the types of preference shares?

Common types are cumulative, non-cumulative, redeemable, convertible and participating preference shares. Under Section 55, a company limited by shares cannot issue irredeemable preference shares, so every new issue must be redeemable.

What is the difference between cumulative and non-cumulative preference shares?

On cumulative shares, dividend not paid in one year builds up and must be cleared before equity gets dividend later. On non-cumulative shares, an unpaid dividend lapses and cannot be claimed in later years.

What are the voting rights of equity shareholders under the Companies Act, 2013?

Under Section 47(1), every member holding equity share capital in a company limited by shares can vote on every resolution. On a poll, the vote is in proportion to the member's share in the paid-up equity capital.

How do I differentiate preference shares and debentures?

Preference shares are part of share capital and holders are members. Dividend is paid only out of profits. Debentures are debt, holders are creditors and interest is due whether or not there are profits.