Different Types of Shares Issued by Companies: An Overview

Every company that wants to raise money by issuing shares must decide what kind of shares to offer. This choice is not just a formality. It decides who gets a say in running the company, who gets paid first when things go well, and who gets protected when things go wrong. The Companies Act, 2013 keeps this fairly simple at the top level, even though the details underneath have a lot of nuance worth understanding.

What the law says: only two kinds of share capital 🔗

Under the Companies Act, a company limited by shares can issue share capital of only two kinds: equity share capital and preference share capital. This is laid down clearly in Section 43 of the Act, which also explains that equity share capital simply means all share capital that does not qualify as preference share capital.

Within equity shares, the law allows a further split: shares with normal voting rights, and shares with differential rights as to dividend, voting, or otherwise, subject to conditions prescribed by the rules. Preference shares, on the other hand, are defined by what they are entitled to ahead of everyone else: a fixed dividend and priority in the return of capital when the company winds up.

Equity shares: ownership with risk and reward 🔗

Equity shares represent real ownership in a company. Anyone holding equity shares is a part-owner, and their fortunes rise and fall with the company’s performance. There is no fixed dividend promised. In a good year, equity shareholders may get a healthy payout. In a bad year, they may get nothing at all. This makes equity shares riskier than preference shares, but also gives them unlimited upside if the company does well.

Equity shares with voting rights 🔗

Most equity shares carry the standard “one share, one vote” principle. Every equity shareholder gets to vote on resolutions placed before the company, and their voting power is proportional to their share in the paid-up equity capital. This is what gives equity shareholders real influence over decisions like appointing directors, approving mergers, or changing the company’s objects.

Equity shares with differential rights 🔗

Companies can also issue equity shares with differential rights as to dividend, voting, or both, as long as this is permitted by the articles of association and follows the prescribed rules. For example, a company might issue shares that carry a higher dividend but fewer voting rights, or the reverse. Founders sometimes use this route to raise capital without giving up proportionate control, though such issues are subject to specific conditions like consistent profitability and caps on how much of the total capital can carry differential rights.

Preference shares: priority without much control 🔗

Preference shares work almost the opposite way. Holders get two clear preferences over equity shareholders: a fixed rate of dividend, paid before any dividend goes to equity shareholders, and priority in getting their capital back if the company is wound up. In exchange for this safety, preference shareholders usually give up voting rights on most matters. They do get voting rights on resolutions that directly affect their class of shares, and if their dividend remains unpaid for two years or more, they gain the right to vote on all resolutions placed before the company.

This structure makes preference shares attractive to investors who want steadier, more predictable returns rather than a share in unlimited upside. It also lets companies raise capital without diluting control the way a fresh issue of equity shares would.

Cumulative and non-cumulative preference shares 🔗

One of the most important distinctions among preference shares is what happens when a company skips a dividend payment in a particular year.

Cumulative preference shares 🔗

With cumulative preference shares, any dividend that goes unpaid in a bad year does not simply disappear. It accumulates as “arrears” and must be cleared, along with the current year’s dividend, before equity shareholders receive anything. If a company skips dividends for three years running, cumulative preference shareholders are still entitled to all three years’ worth once profits allow it.

Non-cumulative preference shares 🔗

With non-cumulative preference shares, a missed dividend is simply lost. If the company does not declare a dividend in a given year, that year’s entitlement does not carry forward. This makes non-cumulative shares riskier for investors, since there is no guarantee of catching up later, even if the company eventually turns profitable. Unless a company’s articles specify otherwise, preference shares are generally presumed to be cumulative in nature, which shows how strongly the law leans toward protecting the shareholder’s claim to dividends.

Redeemable preference shares and the ban on irredeemable ones 🔗

The Companies Act, 2013 takes a firm stance on how long preference shares can stay outstanding. Under Section 55 of the Act, a company limited by shares cannot issue any preference shares that are irredeemable. Every preference share must eventually be bought back by the company.

If authorised by its articles, a company can issue preference shares redeemable within a period not exceeding twenty years from the date of issue. There is a carve-out for infrastructure projects, where preference shares can run longer, but even then, a prescribed percentage must be redeemed each year from the twentieth year onward, at the option of the shareholders.

Redemption itself is tightly regulated. Shares can only be redeemed once they are fully paid up, and the money for redemption has to come either from distributable profits or from the proceeds of a fresh issue of shares made specifically for that purpose. When profits are used, an equivalent amount must be transferred to a Capital Redemption Reserve Account, which then behaves like paid-up capital and protects the company’s creditors from a sudden shrinkage in the capital base.

In short, redeemable preference shares give a company temporary access to capital that behaves a little like debt, since it eventually has to be repaid, but without the fixed repayment schedule or default risk that comes with a loan.

Participating and non-participating preference shares 🔗

The final major distinction concerns how much of a company’s surplus profit preference shareholders get to share in, beyond their fixed dividend.

Participating preference shares 🔗

Holders of participating preference shares receive their fixed dividend first, and then also get to share in any surplus profit left over after equity shareholders have been paid, or in surplus assets if the company winds up. This gives participating preference shareholders a taste of the upside that equity shareholders enjoy, while still keeping their priority claim intact.

Non-participating preference shares 🔗

Holders of non-participating preference shares only ever receive the fixed dividend they were promised. Once that is paid, they have no further claim on the company’s profits or surplus assets, no matter how well the company performs. As noted earlier, preference shares are assumed to be non-participating unless the terms of issue clearly state otherwise, which is worth remembering when reading the fine print of any preference share offer.

Equity versus preference shares at a glance 🔗

Why this classification matters in practice 🔗

For a company’s finance team, choosing between equity and preference shares, and between the various sub-types of preference shares, is a real capital-structuring decision. Issuing more equity dilutes ownership and control. Issuing redeemable preference shares brings in capital without dilution but creates a future repayment obligation. Choosing cumulative over non-cumulative terms, or participating over non-participating terms, changes how attractive the instrument looks to investors and how much it eventually costs the company.

The Institute of Company Secretaries of India has repeatedly pointed out that these classifications also affect compliance obligations, disclosure requirements, and the rights that different classes of shareholders can enforce against the company. Getting the structure right at the time of issue avoids disputes later, particularly around dividend arrears or redemption timelines.

For investors, the distinctions matter just as much. A conservative investor looking for steady, predictable income might prefer cumulative, non-participating, redeemable preference shares, since they combine payment security with an eventual exit. A more risk-tolerant investor chasing growth would lean toward equity shares, or perhaps participating preference shares that offer a blend of safety and upside, as explained in this overview of preference share types.

It is also worth noting that companies sometimes combine features. A preference share could be cumulative and participating at the same time, or redeemable and non-participating. The Companies Act does not force a single combination; it only sets the outer boundaries, such as the ban on irredeemable shares and the conditions for differential voting rights. Within those boundaries, companies have real flexibility to design instruments that suit both their own needs and investor appetite, a point discussed in detail by corporate law practitioners who work on these issuances regularly.

What do you think? If you were advising a growing company that needs fresh capital but does not want to dilute the founders’ control, would you lean toward redeemable preference shares or equity shares with differential voting rights, and why? And from an investor’s perspective, would you rather hold cumulative non-participating shares for steady, protected income, or participating shares for a shot at higher returns?

References

1. http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17422
2. https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&sectionId=1233&sectionno=43&orderno=45
3. https://taxguru.in/company-law/issue-redemption-preference-shares-companies-act-2013.html
4. https://www.icsi.edu/media/webmodules/CSJ/August-2025/13.pdf
5. https://groww.in/p/types-of-preference-shares
6. https://www.corporateprofessionals.com/articles/intricacies-in-issue-of-preference-shares-a-perspective/