By What Is the Difference Between Preference Shares & Equity Shares?
As per Section 43 of the Companies Act (2013), the share capital of a company can be of two kinds, namely, equity share capital and preference share capital, or as we say, preference and equity shares.
Comparison between Equity Shares and Preference Shares
| Basis | Equity Shares | Preference Shares |
|---|---|---|
| Definition | Equity shares basically represent a part-ownership where each shareholder becomes a fractional owner of the issuing company. These are long-term sources of finance for the issuing company and are not redeemable in nature. | Preference shares are a class of share which give the shareholder specified preferential rights as defined within a company’s articles of association. The preferential rights can vary from a priority on payment of dividends and liquidation preference to anti-dilution provisions. |
| Voting Rights [Section 47 of the Companies Act, 2013] |
Every member of a company limited by shares and holding equity share capital has a right to vote on every resolution placed before the company. | Every member of a company limited by shares and holding any preference share capital shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares and, any resolution for the winding up of the company or the repayment or reduction of its equity or preference share capital. This voting right shall be in proportion to the shareholder’s share in paid-up preference share capital. |
| Repayment of capital | No preference. | Preference over equity shareholders. |
| Any other rights | Voting power and part-ownership. | Exit right, liquidation preference, tag along, drag along, Right of First Offer (ROFO), Right of First Refusal (ROFR), anti-dilution, pre-emptive rights. |
| Special Resolution (Consent of 3/4th shareholder for issuance) for approving the terms of shares and filing of MGT-14 |
Not required in case of a private placement of equity shares. | Required. |
| Increase/reclassification of authorised capital and filing of form SH-7 | Not required (if the company has sufficient authorized capital) | Required (authorized capital should be reclassified and increased to the extent of the proposed issue) |
| Preferable mode of issuance | Rights issue | Private placement |
| Separate bank account | No separate bank account is required in case of rights issue of equity shares. | A separate bank account is required in the case of a private placement of equity/preference shares. |
| Valuation report evidencing the price of shares at the time of issuance | Not required | Required |
| Allotment of shares | Form PAS-3 shall be filed within 30 days from the date of issuance of shares. | Form PAS-3 shall be filed within 15 days from the date of issuance of shares in the case of a private placement. |
Click here for a webinar on India’s various debt funding instruments (CCDs, CCPS, etc.).
ESOP & CAP Table
Management simplified
Get started for free
