Did you know that you can say “ABC Company Ltd works for me ” if you have shares in the same? Yes, you can say it if you understand who are shareholders and what are their responsibilities and this blog would help you to understand in detail all about shareholders. But first, let’s try to understand the meaning of share and shareholder and why the company issues shares.
Generally, when the company goes for expansion there is a requirement for huge funds and to meet the same company raises funds from the public through the issue of shares.
In simple terms, a share is a unit of equity capital of the company. Let’s say for example a company wants to raise a capital of 1 lakh from the public it divides the capital of 1 lakh into thousand shares of rupees 100 each. Further, any person, company, or organization that holds at least one share of the company is known as a shareholder of the company.
Now let us find out who are the different types of shareholders in a company and what are their rights and responsibilities along with the advantages and disadvantages associated with them.
Types of Shareholders
Broadly the shareholders are classified into two types they are Preference shareholders and Equity shareholders
Preference shareholders
The shareholders who have preferential rights on dividends and profits of the company are known as preference shareholders. It means that preference shareholders are entitled to receive the dividends before ordinary/equity shareholders and claim the profits before the equity shareholders.
Equity shareholders
The shareholders who do not enjoy preferential rights in the company are called equity shareholders or ordinary shareholders. It means that the equity shareholders are entitled to receive dividends and profits only after preference shareholders have claimed.
Now let’s understand the basic differences between preference and equity shareholders more easily with the help of a table.
| S. N. | Basis of difference | Preference Shareholders | Equity Shareholders |
| 1. | Dividend Payout | Preference Shareholders receive dividends before the equity shareholders | Equity shareholders receive the dividend only after all the liabilities are paid |
| 2. | Rate of dividend | The rate of dividend is fixed for preference shareholders irrespective of profits made by the company | The rate of dividend varies for equity shareholders depending upon the profits made by the company |
| 3. | Voting rights | Preference shareholders do not have any voting rights in the company | Equity shareholders have voting rights in the company |
| 4. | Repayment of capital | At the time of liquidation of the company, Preference shareholders are reimbursed with capital before Equity shareholders. | Equity shareholders are entitled to reimbursement after all the liabilities are met. |
| 5. | Role in management | They are not allowed to participate in the management of the company | Equity shareholders are permitted to participate in management with their voting rights. |
| 6. | Redemption of shares | Preference shares are redeemable in nature | Equity Shares are not redeemable in nature |
| 7. | Convertibility of Shares | Preference shares can be converted into equity shares | Equity shares cannot be converted into preference shares |
| 8. | Mandate to issue | Issuing Preference shares is not compulsory for the company | Issuing of equity shares is compulsory for all the listed companies. |
| 9. | Types in shares | We see various types of shares such as cumulative, non-cumulative, redeemable non-redeemable preference shares. | Equity shares are grouped only as ordinary shares of the company. |
| 10. | Bonus issue | Preference shareholders are not entitled to bonus shares | Equity shareholders are not entitled to bonus shares. |
| 11. | Arrears of Dividends | Preference shareholders can get the arrears of previous dividends along with the current year’s dividend if it is cumulative preference shares. | Equity shareholders are not entitled to get the arrears of dividends. |
| 12. | Suitability for investors | Preference shares are suitable for risk-averse investors (the investors who don’t want to take risks) | Equity shares are suitable for risk-taking investors. |
| 13. | Obligation to company | Paying dividends to preference shareholders is a compulsory obligation to the company | In the case of Equity shareholders, dividends are given to them only when the company makes a profit and is paid after the preference shareholders. |
| 14. | Liquidity | Preference shares are not having high liquidity, and can only be sold to the company. | Equity shares have high liquidity and can be bought and sold by every retail investor. |
These are a few major differences we see between Equity and Preference shareholders. Now let us know about some common rights every shareholder has irrespective of Preference shares and equity shares.
Rights for All Types of Shareholders
- Right to inspect books and records of the company
- Right to sue the company and management in case of any misdeeds.
- Right to receive the dividend declared by the company
- Right to be intimated about the Annual General Meeting and Corporate actions of the company as and when takes place.
Rights that hold good only for equity shareholders
- Right to appoint a proxy (under section 176 of the Companies Act, 2013) to attend the company on behalf of the Shareholder in case of inconvenience, by this the actual shareholder does not miss his/her voting rights
- Right to transfer the ownership of shares by selling them on stock exchanges. This ensures liquidity to shareholders.
In closing
In this blog, we have learned in detail about what shares are, who are the shareholders, and the types of shareholders along with their rights and the major differences between them. That’s all for this blog, keep learning and investing.
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