Points of distinction between preference share and equity share

 The share capital of company consists of equity share and preference. 

Section 43 of the Companies Act 2013 provides that the issue of share capital of a company limited by shares will be of two kinds –

• Equity Shares ( ordinary shares)
• Preference Shares

Equity share capital shall be of two kinds –

1. Equity share with voting rights or
2. Equity Shares with differential rights as to dividend, voting etc as per rules.

Preference Shares

Preference share is fullfills two conditions –

1. It carries a preferencial right to be paid a fixed amount from dividend.
2. On winding up of company, preferencial right of re-payment of paid up capital.

Distinction

The above mentioned two types of shares are the share capital of company. These two types of shares also differ from each other in following respect –

1. Preference shares are more like a debentures. Preference shares holders are entitled to a fixed right of dividend like the interest payable at a fixed rate. While equity share holder recieve the dividend depending on the amount of profit available.
2. The dividend on equity share is paid only after the dividend on preference shares has been paid.
3. The preference shares have preference over equity shares in the matter of re- payment of capital on winding up.
4. In case of preference shares, if they are cumulative preference share, the dividend not paid in a particular year shall be accumulated and until such arrears of dividend are paid. But in case equity share there is no such provision.
5. Redeemable preference shares may be redeemed by the company but equity shares cannot be redeemed except under a scheme involving reduction of capital.
6. A company may issue rights shares or bonus shares to its existing equity shareholders where as it is not so in case of preference shares.
7. The equity shareholders can vote on all matters affecting the company but in case of a preference shareholders they can vote only when his special rights as a preference share holder are being varied are his dividend is in arrears.