Company Law and Practice · Share and Share Capital - Concepts

Kinds of Share Capital under Section 43 of the Companies Act

Updated 11 October 2026 · Fact-checked

Under Section 43, a company limited by shares can have only two kinds of share capital: equity share capital and preference share capital. Equity share capital is all capital that is not preference capital. It carries voting rights or differential rights. Preference capital carries a preferential right to dividend and to repayment of capital on winding up.

Understand Kinds of Share Capital under Section 43

A company limited by shares raises money by issuing shares. Section 43 says this share capital can be of only two kinds: equity share capital and preference share capital. There is no third kind.

The Act defines equity by exclusion. Equity share capital means all share capital which is not preference share capital. So first test whether capital is preference. If it is not, it is equity.

Equity capital can be of two types. It can be with voting rights, or with differential rights as to dividend, voting or otherwise. Differential rights must be in accordance with the rules prescribed. A company may, for example, issue equity shares that carry fewer votes or a different dividend rate than ordinary equity shares.

Preference share capital is that part of the issued share capital which carries or would carry a preferential right on two counts together: (a) payment of dividend, either a fixed amount or an amount at a fixed rate, and (b) repayment of the paid-up capital on winding up or repayment of capital. The right to a fixed premium on repayment may or may not exist.

A share does not stop being preference only because it also participates. If preference capital also shares in extra dividend, or in surplus left after all capital is repaid on winding up, it is still deemed preference capital. Participating preference shares are therefore still preference shares.

Key rules to remember

Two kinds of share capital: Share capital = Equity share capital + Preference share capital; Applies to a company limited by shares. No other kind is recognised in Section 43.
Meaning of equity share capital: Equity share capital = all share capital that is not preference share capital; It is either with voting rights or with differential rights as to dividend, voting or otherwise, as per prescribed rules.
Test for preference share capital: Preferential right to dividend (fixed amount or fixed rate) AND preferential right to repayment of paid-up capital on winding up or repayment of capital; Both preferential rights must be present for capital to be preference capital.
Participating preference shares: Preference capital + right to participate in extra dividend and/or surplus on winding up = still preference capital; Participation does not change its character, as per the Explanation to Section 43.

How to solve Kinds of Share Capital under Section 43 questions

Use this method for any question asking you to classify capital or explain Section 43.

1Identify the company. Section 43 applies to a company limited by shares.
2State the rule: two kinds only, equity and preference.
3Apply the preference test: does the capital carry a preferential right to fixed dividend and to repayment of capital on winding up?
4If both rights exist, classify it as preference capital. If not, it is equity capital, because equity means everything that is not preference.
5For equity, say whether it has voting rights or differential rights as to dividend, voting or otherwise, per the prescribed rules.
6Check the participation rule: extra rights to share in surplus dividend or surplus assets do not stop it being preference capital.
7Write a clear conclusion naming the kind of capital and citing Section 43.

Quickest way: Two-question classification

When to use it: Use this when a short question gives the features of a share and asks which kind it is.

Ask: does it have a preferential right to fixed dividend and to return of capital first? If yes, it is preference.
If no, it is equity by default.
Then label equity as voting or differential rights.
Write one line citing Section 43 and the conclusion.

Common mistakes in Kinds of Share Capital under Section 43

Saying there are three kinds of share capital, adding differential rights shares as a separate kind.
Differential rights appear as a separate item in the section, so students count them as a third kind.
Fix: Differential rights shares are a type of equity share capital. Section 43 has two kinds only.
Defining equity share capital by its features instead of by exclusion.
Students recall the everyday idea that equity holders own the company.
Fix: Quote the statutory definition: all share capital which is not preference share capital.
Treating participating preference shares as equity.
They share in extra profits like equity holders.
Fix: Under the Explanation, capital with participation rights in addition to the preferential rights is deemed preference capital.
Claiming a share is preference because it has only one of the two preferential rights.
Students remember dividend priority and forget the capital repayment priority.
Fix: State both limbs: preferential dividend at a fixed amount or rate, and preferential repayment of capital.
Applying Section 43 to every company.
The word company is used loosely.
Fix: Section 43 speaks of a company limited by shares. Say so at the start of your answer.
Mixing Section 43 with Section 47 and Section 55 in the answer.
All three deal with shares, so details blur.
Fix: Use Section 43 for kinds, Section 47 for voting rights and Section 55 for issue and redemption of preference shares. Cite each only where the question asks.

Worked examples

Example 1

Sunrise Textiles Ltd, a company limited by shares, has issued shares that carry a fixed 9% dividend payable before any dividend to other shareholders and a right to repayment of capital before other shareholders on winding up. They also share in surplus assets after all capital is repaid. Under Section 43, what kind of share capital is this?

Show the solution

Provision: Section 43 allows two kinds of share capital, equity and preference. Preference capital carries a preferential right to fixed dividend (a fixed amount or rate) and to repayment of paid-up capital on winding up.
Facts: the shares carry a fixed 9% dividend paid first, and capital is repaid first on winding up. Both preferential rights are present.
Analysis: the extra right to share in surplus assets after all capital is repaid is a participation right. Under the Explanation to Section 43, such participation does not take away its preference character.
Conclusion: the capital is preference share capital.

Answer: It is preference share capital under Section 43, because it carries both preferential rights. The participation in surplus does not change that.

Example 2

Explain the kinds of share capital a company limited by shares may have under Section 43. Is capital with differential voting rights a separate kind?

Show the solution

Provision: Section 43 provides that the share capital of a company limited by shares shall be of two kinds: equity share capital and preference share capital.
Equity: it means all share capital which is not preference share capital. It may be with voting rights, or with differential rights as to dividend, voting or otherwise, in accordance with the prescribed rules.
Preference: it is the part of issued capital that carries or would carry a preferential right to fixed dividend and to repayment of paid-up capital on winding up or repayment of capital.
Analysis: differential rights are listed under clause (a), which deals with equity share capital. They describe a type of equity, not a separate head.
Conclusion: capital with differential rights is equity share capital, so there are still only two kinds.

Answer: There are two kinds: equity and preference. Differential rights capital is a type of equity share capital, not a third kind, and it must follow the prescribed rules.

Exam tips

Begin every answer with the rule: two kinds only, equity and preference, for a company limited by shares, citing Section 43.
Remember the definition of equity is by exclusion. Examiners like this exact point.
In classification problems, run the two-limb preference test and then state your conclusion.
Mention that participating preference shares remain preference capital. It is a common trap in case questions.
Keep voting rights (Section 47) and redemption (Section 55) for questions that ask for them. Do not pad the answer.

Practice questions from Share and Share Capital - Concepts

Kinds of Share Capital under Section 43 in other exams

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

Kinds of Share Capital under Section 43: frequently asked questions

What are the kinds of share capital under Section 43?

A company limited by shares can have two kinds: equity share capital and preference share capital. Equity share capital may be with voting rights or with differential rights. There is no other kind.

What is the difference between equity shares and preference shares?

Preference shares carry a preferential right to fixed dividend and to repayment of capital on winding up. Equity share capital is all capital that is not preference capital. Equity is by default the residual class, with voting rights or differential rights.

What are shares with differential voting rights?

They are equity shares with differential rights as to dividend, voting or otherwise. Section 43 allows them in accordance with the rules prescribed. They are a type of equity share capital, not a separate kind.

Are participating preference shares equity or preference?

They are preference shares. The Explanation to Section 43 says capital is deemed preference capital even if it also has a right to participate in extra dividend or in surplus on winding up.