Business Laws and Management · Elements of Company Law

Prospectus and Share Capital Basics for CSEET

Updated 11 October 2026 · Fact-checked

A prospectus is a document a company uses to invite the public to buy its securities. Share capital under the Companies Act, 2013 is of two kinds: equity and preference. To solve questions, identify the term, recall the rule and its section, then match it to the facts given.

Understand Prospectus and Share Capital Basics

A company needs money to run. One way is to raise it from the public by issuing shares. To do this, it publishes a prospectus. This is an invitation document. It tells investors what the company does, how it is funded and what it offers.

Because investors rely on the prospectus, it must be accurate. Section 30 deals with advertisements of a prospectus. If an advertisement is published in any manner, it must specify the contents of the memorandum as regards objects, the liability of members and the amount of share capital. It must also give the names of the signatories to the memorandum, the number of shares they subscribed for, and the company's capital structure.

Now the shares. 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 is defined by exclusion. It means all share capital that is not preference share capital. It can carry voting rights, or differential rights as to dividend, voting or otherwise, as per prescribed rules.

Preference share capital carries a preferential right in two things: payment of dividend (a fixed amount or a fixed rate) and repayment of capital on winding up or repayment of capital. A share does not stop being preference just because it also participates in surplus dividends or surplus assets, as clause (iii) of the Explanation says.

Voting differs too. Under Section 47, an equity member can vote on every resolution, and on a poll the vote is in proportion to paid-up equity capital. A preference shareholder can vote only on resolutions that directly affect the rights of those shares, or on winding up, or on repayment or reduction of its equity or preference capital. If the preference dividend is unpaid for two years or more, that class can vote on all resolutions.

Key formulas to remember

Two kinds of share capital (Section 43): Share capital = Equity share capital + Preference share capital; Equity means all share capital that is not preference share capital. It may have voting rights or differential rights.
Preference share test (Section 43): Preference = preferential right to (dividend) AND (capital repayment on winding up or repayment of capital); Dividend is a fixed amount or at a fixed rate. Extra participation rights do not remove the preference status.
Voting of equity members (Section 47(1)): Right to vote on every resolution; poll vote ∝ paid-up equity capital held; Applies to members of a company limited by shares holding equity capital.
Voting of preference members (Section 47(2)): Vote only on resolutions directly affecting their rights, winding up, or repayment or reduction of capital; If the dividend on a class is unpaid for two years or more, that class votes on all resolutions.
Securities premium (Section 52(1)): Securities premium account = total premium received on shares issued at a premium; The reduction-of-capital provisions apply to it as if it were paid-up share capital, except as Section 52 provides.
Reduction of share capital (Section 66(1)): Special resolution + confirmation by the Tribunal; Not allowed if the company is in arrears in repaying deposits or interest on them.

How to solve Prospectus and Share Capital Basics questions

Use the same routine for every question, whether it is a one-mark MCQ or a written short answer.

1Read the question and spot the key term: prospectus, equity, preference, premium or reduction.
2Decide whether it asks for a definition, a content list, a right (dividend, voting, repayment) or a procedure.
3Recall the rule in plain words and link it to its section: 30, 43, 47, 52 or 66.
4Check the exact condition in the rule, such as 'two years or more' or 'special resolution'.
5Match the facts in the question to the rule and eliminate options that break any condition.
6For a written answer, state the rule, apply it to the facts, then give a one-line conclusion.

Quickest way: Keyword-to-rule matching

When to use it: Use this in the OMR paper when you have about a minute per question.

Underline the keyword in the question stem.
Link it to one fixed memory hook: 'Two kinds' for Section 43, 'Vote' for Section 47, 'Premium' for Section 52, 'Reduce' for Section 66.
Test each option against the exact condition, such as fixed dividend, two years, special resolution or Tribunal.
Cross out options that mix up equity and preference features.
Pick the remaining option and move on. Do not leave any question blank, as there is no negative marking.

Common mistakes in Prospectus and Share Capital Basics

Saying preference shareholders have full voting rights like equity holders.
Students remember that both are shareholders and assume equal voting.
Fix: Remember Section 47(2): preference holders vote only on limited matters, unless dividend has been unpaid for two years or more.
Thinking a preference share that also shares in surplus profits becomes equity.
Students treat participation as the defining feature of equity.
Fix: Section 43 says capital stays preference even if it also participates in dividends or surplus assets, as long as the preferential rights exist.
Listing the Section 30 items incompletely.
The list is long and students remember only objects and share capital.
Fix: Recall five groups: objects, liability of members, amount of share capital, names of signatories with shares subscribed, and capital structure.
Believing a company can reduce capital by board decision alone.
Students confuse board powers with shareholder powers.
Fix: Section 66 needs a special resolution and confirmation by the Tribunal.
Treating the securities premium account as free money for any use.
The word 'premium' sounds like profit.
Fix: Section 52 allows only listed uses, such as bonus shares, writing off preliminary expenses or issue expenses, premium on redemption, or buy-back under Section 68.

Worked examples

Example 1

Aarav Textiles Ltd. has issued 10% preference shares. It has not paid the dividend on this class for the last three years. A resolution on an unrelated matter is placed before the company. Can the preference shareholders vote on it?

Show the solution

Identify the rule: Section 47(2) limits preference voting to resolutions affecting their rights, winding up, or repayment or reduction of capital.
Check the proviso: if the dividend on a class of preference shares has not been paid for two years or more, that class can vote on all resolutions.
Apply the facts: the dividend has been unpaid for three years, which is more than two years.
The condition is met, so the limit no longer applies.

Answer: Yes. Because the dividend has been unpaid for two years or more, the preference shareholders of that class can vote on all resolutions, including the unrelated one.

Example 2

Explain the two kinds of share capital of a company limited by shares and state how preference share capital is identified.

Show the solution

State the rule: under Section 43, share capital is either equity share capital or preference share capital.
Define equity: it means all share capital that is not preference share capital. It may have voting rights, or differential rights as to dividend, voting or otherwise as prescribed.
Define preference: it carries a preferential right to payment of dividend, either a fixed amount or at a fixed rate, and to repayment of capital on winding up or repayment of capital.
Add the clarification: capital is still preference even if it also participates in dividends or in surplus assets after all capital is repaid.

Answer: A company limited by shares has equity and preference share capital. Preference capital is identified by its preferential rights to a fixed dividend and to return of capital. Everything else is equity.

Exam tips

Learn Section 43 and Section 47 together. MCQs often compare equity and preference rights.
Memorise the 'two years or more' condition for preference voting. Examiners like to test it.
For written answers, begin with the rule and its section, then apply it. Do not just list points.
In Paper 4 there is no negative marking, so attempt every question and use elimination.
Watch for distractors that attach equity features, such as full voting, to preference shares.

Practice questions from Elements of Company Law

Prospectus and Share Capital Basics in other exams

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

Prospectus and Share Capital Basics: frequently asked questions

What must a prospectus advertisement contain?

Under Section 30, it must specify the contents of the memorandum as regards objects, liability of members and amount of share capital. It must also give the names of the signatories and the shares they subscribed for, and the capital structure.

What is the difference between equity and preference shares?

Preference shares carry a preferential right to a fixed dividend and to return of capital on winding up. Equity share capital is all share capital that is not preference. Equity members generally vote on every resolution, while preference members vote only on limited matters.

Can preference shareholders ever vote on all resolutions?

Yes. If the dividend on a class of preference shares has not been paid for two years or more, that class has the right to vote on all resolutions placed before the company.

How can a company reduce its share capital?

Under Section 66, a company limited by shares or by guarantee with share capital may do so by special resolution, subject to confirmation by the Tribunal. It cannot do so if it is in arrears in repaying deposits or interest on them.