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EQUITY AND PREFERENCE SHARES

EQUITY SHARES

Equity Shares are those shares which are paid dividends only when profits are left after the preference shareholders have been paid fixed rate of dividends. In other words, there will be no fixed rate of dividend on the equity shares. Equity shareholders have voting rights and control of the affairs of the company.

PREFERENCE SHARES

Preference shares are those which carry the following two preferential rights:

  • They have a right to receive dividend at a fixed rate before any dividend is paid on the equity shares.
  • When the company is wound up, they have a right to the return of capital before that of equity shares.

Also, the preference shares may carry some more rights such as the right to participate in excess profits when a specified dividend has been paid on the equity shares or the right to receive a premium at the time of redemption.

DIFFERENCE BETWEEN EQUITY AND PREFERENCE SHARES

BASIS OF DIFFERENCE PREFERENCE SHARES EQUITY SHARES
RIGHT TO DIVIDEND Dividend is paid on Preference shares before it is paid on the Equity shares. Dividend is paid on the equity shares after it is paid on the preference shares.
RATE OF DIVIDEND Rate of dividend may be fixed on these shares. Rate of dividend is proposed by the Board of Directors each year.
ARREARS OF DIVIDEND If Preference shares are Cumulative Preference Shares, the dividend gets accumulated and will be paid before any payment of dividend to equity shareholders. Dividend is declared every year. In case, dividend is not declared during the year, it is not accumulated to be paid in the coming years.
CONVERTIBILITY Preference shares may be converted into equity shares, if the terms of issue so provide. Equity shares are not convertible.
REDEMPTION Preference shares are redeemed on due date. A company may buy-back its equity shares.
VOTING RIGHTS Preference shareholders have voting rights only in special circumstances. Equity shareholders have voting rights in all circumstances.
REFUND OF CAPITAL In case of winding up of the company, the preference share capital is repaid before the equity share capital is paid. In case of winding up of the company, the equity share capital is repaid after the preference share capital is paid.
PARTICIPATION IN MANAGEMENT Preference shareholders do not have a right to participate in the management of the company. Equity shareholders have a right to participate in the management of the company.
REQUIREMENT FOR FORMATION A new company cannot be formed only with preference shares. A new company can be formed only with the equity shares.
TYPES There are 8 types of preference shares. There is no such type of equity shares, however sweat equity shares are covered under this category.

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