Equity and Preference Shares

INTRODUCTION

The company has the right to should be kind of shares which are equity shares and preference shares. Equity shares are also known as ordinary shares. While the preference shareholders as the benefit of enjoying the voting rights in the major company decisions which includes mergers and acquisitions.[1] The rate of dividend is fixed water preference shares. Moreover, when the company is winding up the distribution of the capital has to be done first to preference shareholders before equity shares. The preference shareholders carry some rights to participate in the excess profit under which there is specified evident which paid on the equity shares.[2]

DEFINITIONS UNDER SWEAT EQUITY SHARES

 I.                   SWEAT EQUITY SHARES

As per Section 2(88)[3] of the Companies Act,  2013 sweat equity shares are the shares which are issued by company to its directors or employee is at a discount are for the consideration.[4] These are not stored in the terms of cash but these are used for providing the rights available under the nature of intellectual property.[5]

 II.                EMPLOYEE

 As per rule 8(1) of the Company’s Share, Capital and Debentures Rules 2014 Employee means

“(a) permanent employee of the company who has been working in India or outside India, for at least last one year; or

(b) A director of the company, whether a whole time director or not; or

(c) An employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company”.[6]

As for this rule the definition of employee can be stated open an employee of a company that has been working in India or outside India for at least 1 year and employee can also includes a director it can be a whole time director or not who has been working in India or outside India or holder company of the company.[7]

 III.             VALUE ADDITIONS

 As per rule one of the company share, capital and debentures rule 2014 an employee has an actual and anticipated economic benefits under an expert to provide knowledge to whom to issue sweat equity shares.[8] Under value additions the actual are anticipated economic benefits are derived by the company.[9]

IV.              CONDITIONS FOR ISSUE

There are conditions which has been set up for issuing of sweat equity shares under rule 8 of companies, shares and debentures rules 2014-

  1. There shall be a valid issue of the equity shares so that when the allotment is being made within a period of time it should not face any difficulty and should be done within 12 months from the date of passing of the special resolution.[10]
  2. The special resolution specifies the number of shares the current market price and the consideration and it may include the class for the classes of directors of the companies today’s equity shares have been issued.[11]
  3. While issuing the Sweat equity shares the employees should be locked in non transfer label period for 3 years from the date of allotment.

The Sweat equity shares are issued with the regulations made under securities and exchange board. If these regulations are not obeyed then sweat equity shares will not be issued and not be listed with the company share capital and debenture rules 2014.[12]

PREFERENCE SHARES

Under the preference shares there is a Priority about the payment of dividend and repayment of capital.[13] The rate of dividend under the preference share is fixed. Additional, dividend can be paid to the profits after the payment of equity dividend. The preference share capital will remain with the company on a permanent basis but in the case of redeemable preference shares this is not done. There is no charge over the assets of the company and other preference shares. There is no voting rights hold by the preference shareholders. If there is surplus amount of finance in the company then redeemable shares can be paid off.[14] The dividends on the cumulative preference shares are carried forward to the next year if the company has sufficient profits.[15]

TYPES OF PREFERENCE SHARES

Preference shares are of the following types-

  1. Cumulative Preference Shares

Under the cumulative preference shares, the dividend can also be cleaned for those years for which there were no profits.[16].

      2. Non Cumulative Preference Shares

Under the non cumulative preference shares, the holders of the shares have no claim for the arrears of dividend. The dividends cannot be claimed in the subsequent years.

       3. Redeemable Preference Shares

The capital of a company is only being paid at the time of liquidation. The company cannot return the share capital nor can the shareholder demand its repayment.[17] The company has right to issue redeemable preference shares if the articles of association allow such an issue. After certain period the company has the right to return the redeemable preference shares capital. There are certain restrictions on the return of this capital under the Companies Act. The shares to be redeemed must be fully paid up.

These shares can only be redeemed by the company in the way of profits out or through the fresh issue of capital. Under this the resources of the company are not depleted.

      4. Irredeemable Preference Shares

Under the shares can only be redeemed, if the company is liquidated.

     5. Participating Preference Shares

Under the participating preference shares the holders participate in the profits of the company. Under this, the fixed rate of dividend is paid first and then a reasonable rate of dividend is paid on equity shares.[18]

      6.  Non Participating Preference Shares

Under this the shares on which the fixed rate of dividend is paid is known as non participating preference shares

     7. Convertible Preference Shares

Under the convertible preference shares by shareholders are given the right to convert their Holdings into equity shares after the specified period.[19]

     8. Non-Convertible Preference Shares

Under non convertible preference shares the shareholders are not given the right to get converted into equity shares.

ADVANTAGES OF PREFERENCE SHARES

Under the preference shares the rate of return is guaranteed. The preference shares helps in raising the long term capital for a company.[20] Redeemable Preference Shares gives an advantage to the company for the repayment of the capital whenever there is surplus in the company. Mortgage property does not apply on these shares.[21]

 

[1] Difference between Preference Shares and Equity shares , (2015), http://www.gktoday.in/blog/difference-between-preference-shares-and-equity-shares/ (last visited Apr 19, 2017).

[2] Surbhi S , Difference Between Equity Shares and Preference Shares (2015), http://keydifferences.com/difference-between-equity-shares-and-preference-shares.html (last visited Apr 19, 2017).

[3] Sweat Equity Shares” means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

[4] Id.

[5] Akshay Vernekar, ISSUE OF SWEAT EQUITY SHARES UNDER THE ACT OF 2013 (2016), https://www.linkedin.com/pulse/issue-sweat-equity-shares-under-act-2013-akshay-vernekar (last visited Apr 6, 2017).

[6] Companies Act, 2013, Complete Act – Bare Act, , https://www.legalcrystal.com/act/63265/companies-act-2013-complete-act (last visited Apr 6, 2017).

[7] Lokesh Sharma, Sweat Equity Shares (2016), https://www.quickcompany.in/articles/sweat-equity-shares (last visited Apr 6, 2017).

[8] Supra note 9.

[9] Id.

[10] Law Gyaan, Procedure to issue Sweat Equity Shares under Companies Act 2013 (2017), http://lawgyaan.in/procedure-issue-sweat-equity-shares-companies-act-2013/ (last visited Apr 6, 2017).

[11] Indiafilings, Issue Sweat Equity SharesIssue Sweat Equity Shares (2016), https://www.indiafilings.com/learn/issue-sweat-equity-shares/ (last visited Apr 6, 2017).

[12] Admin, SWEAT EQUITY SHARES As per Companies Act, 2013 (2016), http://taxguru.in/company-law/sweat-equity-shares-per-companies-act-2013.html (last visited Apr 6, 2017).

[13] Voting Rights on Preference Shares: An Unclear Provision?, (2015), http://indiacorplaw.blogspot.in/2015/11/voting-rights-on-preference-shares.html (last visited Apr 18, 2017).

[14] B. Srinivas, Voting Rights of Preference Shareholders under Companies Act, 2013 Voting Rights of Preference Shareholders under Companies Act, 2013 (2015), http://taxguru.in/company-law/voting-rights-preference-shareholders-under-companies-act-2013.html (last visited Apr 18, 2017).

[15] Sumit Jaiswal , Voting rights of cumulative preference shares, http://www.caclubindia.com/forum/voting-rights-of-cumulative-preference-shares-248674.asp (last visited Apr 18, 2017).

[16] Preference shares: capital or debt? An Indian perspective, Preference shares: capital or debt? An Indian perspective (2007), http://www.livemint.com/Money/t1gkPobMJOxtkOWoPY8kTK/Preference-shares-capital-or-debt-An-Indian-perspective.html (last visited Apr 18, 2017).

[17] Winnie Shekhar & Suneeth Katarki, India: Should Investors Still Prefer The Preferred? – A Perspective On Investing In Preference Shares In The Light Of The New Companies Act, 2013India: Should Investors Still Prefer The Preferred? – A Perspective On Investing In Preference Shares In The Light Of The New Companies Act, 2013 (2014), http://www.mondaq.com/india/x/360936/Corporate Commercial Law/Should Investors still prefer the preferred A perspective on investing in preference shares in the light of the new Companies Act 20131 (last visited Apr 18, 2017).

[18] Issuing of Shares with Differential Rights, Companies Act 2013, , https://novojuris.com/2014/05/06/issuing-of-shares-with-differential-rights-companies-act-2013/ (last visited Apr 18, 2017).

[19] Capital of a Company, , http://www.legalserviceindia.com/company%20law/com_2.htm (last visited Apr 18, 2017).

[20] RIGHTS OF PREFERENCE SHAREHOLDERS, , https://www.scribd.com/doc/3284766/RIGHTS-OF-PREFERENCE-SHAREHOLDERS (last visited Apr 18, 2017).

[21] Difference between Preference Shares and Equity shares , (2015), http://www.gktoday.in/blog/difference-between-preference-shares-and-equity-shares/ (last visited Apr 18, 2017).

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