{"id":36668,"date":"2021-10-16T15:20:29","date_gmt":"2021-10-16T09:50:29","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=36668"},"modified":"2021-10-16T15:20:31","modified_gmt":"2021-10-16T09:50:31","slug":"types-of-shares-securities-for-private-limited-companies","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/","title":{"rendered":"Types of Shares \/ Securities for Private Limited Companies"},"content":{"rendered":"\n<p class=\"has-drop-cap\">This blog&nbsp;discusses the various&nbsp;types\nof shares\/securities available to Private Limited Companies. Shares, also known\nas securities under the Companies Act of 2013, are amongst the financial tools\nused to obtain revenue for a corporation. Shares are ownership interests in a\nbusiness entity&nbsp;or financial assets that provide an equitable distribution\nof profits in the form of dividends, if any are declared.<\/p>\n\n\n\n<p>A private limited company is described as one\nwith a minimum paid-up share capital of Rs. 1 lakh, as specified under section\n2(68). Except in the context of a one-person company, where the number of\nmembers is limited to 200, the company&#8217;s AOA&nbsp;prohibit the transfer of\nshares to the public.<\/p>\n\n\n\n<p>Private limited companies are created with the\nintention of forming a people&#8217;s organisation that is not open to the public.\nThey are allowed to hold securities or shares, but they cannot be distributed\nto the general public. The only persons who can buy and sell stocks are the\nmembers itself.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/#Types_of_Shares\" >Types of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/#Equity_share\" >Equity share<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/#Preference_Shares\" >Preference Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/#Preference_shares_are_further_categorised_as_follows\" >Preference shares are further categorised as follows<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/#Types_of_Shares_on_the_basis_Of_Dividend_Payout\" >Types of Shares on the basis Of Dividend Payout<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/#Types_of_Shares_on_the_basis_of_Convertibility\" >Types of Shares on the basis of Convertibility<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/#Types_of_Shares_on_the_basis_of_Redeemability\" >Types of Shares on the basis of Redeemability<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/corpbiz.io\/learning\/types-of-shares-securities-for-private-limited-companies\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Types_of_Shares\"><\/span>Types of Shares <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong><em>There are two types of shares:-<\/em><\/strong><\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" width=\"606\" height=\"326\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/10\/image.png\" alt=\"Types of Shares \" class=\"wp-image-36669\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/10\/image.png 606w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/10\/image-300x161.png 300w\" sizes=\"(max-width: 606px) 100vw, 606px\" \/><\/figure><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Equity_share\"><\/span>Equity share <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>All equity is considered equally in this form of\nshare, which is the most prevalent amongst all the types of shares. The terms\n&#8220;equal&#8221; and &#8220;quality&#8221; can be used to describe equity\nshares. These shares have the same value and are so considered the same. Equity\nshares are the ones that do not have any preferential privileges when it comes\nto capital repayment or dividends. Equity shares are described as shares other\nthan preference shares, according to the Companies Act. If someone holds stock\nin a business entity, their shares come with all of the voting and other rights\nthat come with it. It&#8217;s known as common stock in the United States.&nbsp;Equity\nshares are riskier as compares to preference shares. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Equity shares with differential voting rights<\/h3>\n\n\n\n<p>Equity shares are one of the specific types of shares of <a href=\"https:\/\/corpbiz.io\/company-registration\"><strong>private limited company<\/strong><\/a> shares. Ordinary shares with differential voting rights are similar to equity shares with differential dividend or voting rights, if any. These stakeholders have a high level of control over the company&#8217;s day-to-day operations.<\/p>\n\n\n\n<p>Only a few businesses in India have issued\nshares with distinct voting rights, like Tata Motors and Future Retail. These\nshares are typically offered to founders or CEOs in order for them to have\ngreater influence over the company&#8217;s day-to-day operations.<\/p>\n\n\n\n<p>In simple terms, one may only issue equity\nshares with unequal voting rights if your private limited company generates\nsufficient revenues to pay the&nbsp;dividends (part of profits) to shareholders\nfor 3 years in a row. For issuing equity shares with differential voting\nrights, the business must meet specific requirements outlined in Rule 4 of the\nCompanies (Share Capital and Debenture) Rules, 2014.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Sweat Equity \u2013 Issued exclusively to employees who deserves <\/h3>\n\n\n\n<p>Sweat equity are the types of shares is given to\nqualified employees who have worked with the firm for at least a year. It is\ngiven to hardworking employees at free cost, which means that the employees do\nnot have to pay anything in exchange for such shares. The shares are simply\nassigned. These shares could not&nbsp;be allocated to those who already hold\nthem. Before they are allotted, an appraisal of the organization must be\nperformed.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">ESOPs &#8211; Shares that encourage employees to perform well&nbsp;for the organization<\/h3>\n\n\n\n<p>Most entrepreneurs battle with how to encourage\ntheir employees in a mutually beneficial way. The Employee Stock Option Plan\n(ESOP), which is utilised by both small and big firms, is the most practical\nsolution to this problem. It deserves personnel engaged to help the\norganisation develop. It also guarantees that you don&#8217;t lose them for a long\ntime. In an ESOP, companies give their employees equity ownership. It is\nfrequently done at no upfront expense, but in lieu of the job they accomplish.\nEmployees are given shares, but they are only granted after a set duration of\ntime. It is not available to freelancers, promoters, consultants, and the like.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Preference_Shares\"><\/span>Preference Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As previously indicated, these are preferred.\nPreference Shares are those types of shares that have priority rights to dividend\npayments and preferential rights to capital return upon the company&#8217;s\nliquidation. The majority of preference shares have a set or absolute dividend\nrate, whereas common shares do not have such preferential rights. A\npreferential right does not have right to vote and are less risky than equity\nshares. The benefit of owning a preferential share is that if the business\nentity&nbsp;is liquidated, the preferential shareholders will be compensated\nout first, after all of the firm&#8217;s obligations have been fulfilled.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Preference_shares_are_further_categorised_as_follows\"><\/span>Preference shares are further categorised as follows<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/10\/image-1.png\" alt=\"Preference shares are further categorised as follows\" class=\"wp-image-36670\" width=\"510\" height=\"359\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/10\/image-1.png 606w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/10\/image-1-300x211.png 300w\" sizes=\"(max-width: 510px) 100vw, 510px\" \/><\/figure><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Types_of_Shares_on_the_basis_Of_Dividend_Payout\"><\/span>Types of Shares on the basis Of Dividend Payout <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\">Cumulative Preference Shares<\/h3>\n\n\n\n<p>Cumulative Preference Shares are the types of\nshares in which dividend arrears are cumulative in nature and are paid before\nany dividend is paid to equity shareholders. Cumulative preferred shares\ncontinue to provide priority shareholders the opportunity to demand an unpaid\ndividend in any future year or years when profits are available for\ndistribution. In this situation, when revenues are available, uncompensated\ndividends are collected and handed out each year.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Non-Cumulative Preference Shares<\/h3>\n\n\n\n<p>Non-Cumulative Preference Shares are those types\nof shares in which the dividend is paid exclusively from the previous year&#8217;s\nnet earnings. If no profits are made in any of the years, the arrears of\ndividends from those years could not&nbsp;be claimed in the&nbsp;later years.\nIf the corporation does not pay the dividend on the preference shares within\nthe fiscal year, the dividend will expire. Unless otherwise indicated to be\nnon-cumulative, preference shares are assumed to be cumulative.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Participating Preference Shares<\/h3>\n\n\n\n<p>In addition to the fixed or absolute rate of\npreference dividend, Participating Preference Shares are allowed to take part\nin the balance of profits with equity shareholders. Following the company&#8217;s\nliquidation, participating preference shares will be entitled to a portion of\nthe company&#8217;s surplus assets. Such a privilege must be clearly specified in the\ncompany&#8217;s MoA and AoA.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Non-Participating Preference Shares<\/h3>\n\n\n\n<p>Non-Participating Preference Shares are the types of shares that are solely subject to a predetermined or fixed&nbsp;rate of dividend and have no option to participate in surplus earnings. Unless otherwise indicated in the company&#8217;s MoA&nbsp;or AoA&nbsp;of the&nbsp;company, or in the conditions of issuance, preference shares are considered to be non-participating.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/5-kinds-of-share-capital\/\">What are the Types of Share Capital? \u2013 Detailed Overview <\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Types_of_Shares_on_the_basis_of_Convertibility\"><\/span>Types of Shares on the basis of Convertibility <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\">Convertible Preference Shares <\/h3>\n\n\n\n<p>Convertible Preference Shares are shares which\ncan be converted into equity shares within a specific time frame.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Non-Convertible Preference Shares<\/h3>\n\n\n\n<p>Non-convertible preference shares are shares\nthat have no right to be converted into equity shares.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Types_of_Shares_on_the_basis_of_Redeemability\"><\/span>Types of Shares on the basis of Redeemability <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\">Redeemable Preference Shares <\/h3>\n\n\n\n<p>Redeemable Preference Shares are those types of shares\nthat can be redeemed within or after a specific time frame. Redeemable\npreference shares are preferential shares that must be repaid by the\ncorporation. This occurs after the time for which the preference shares are\nissued has expired.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Irredeemable Preference Shares<\/h3>\n\n\n\n<p>Irredeemable Preference Shares are the ones&nbsp;that do not have a redeeming right. Irredeemable preferences imply that the corporation is not required to pay back preference shares unless the company is liquidated. In&nbsp;India, the <em><strong>Companies&nbsp;Act, 2013<\/strong><\/em><sup><a href=\"https:\/\/en.wikipedia.org\/wiki\/Companies_Act_2013\"><em><strong>[1]<\/strong><\/em><\/a><\/sup>&nbsp;prohibits a company from issuing irredeemable preference shares.<\/p>\n\n\n\n<p>If a company is not able to redeem any preferential\nshares within a specified time frame, the corporation may issue redeemable\npreferential shares, with the approval of the company&#8217;s Law board, equivalent\nto the redemption of those old preferential shares that could be redeemed on a\nfixed date or within a specified time period of 10 years from the beginning,\nprovided that the below mentioned terms and conditions are met:-<\/p>\n\n\n\n<ul><li>The share may only be redeemed\nif it has been paid in full.<\/li><li>In order to make such an issue,\nthe AOA&nbsp;must be certified.<\/li><li>If a redemption premium is\npayable, it should have made proceeds, profit, or premium accounts accessible\nbefore the shares are repaid.<\/li><li>The share can be redeemed with\nprofits from the organization. It can also be redeemed from dividends or\nearnings, as well as fresh shares created, in order to resale shares.<\/li><li>Whenever the shares are\nredeemed from profits, earnings from the capital reserve account must be\nremitted in an amount equivalent to the nominal amount of the shares being\nredeemed. This amount must be used to repay redeemable preference shares. This\nreserve could be utilised to provide fully paid bonus shares to the company&#8217;s\nmembers.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>You now understand everything there is to know about the types of shares in a&nbsp;private limited ltd company. Feel free to reach out in case you have further queries or would want to take the next step and establish your own business. We are always available to listen to and suit your requirements.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/complete-procedure-for-right-issue-of-shares\/\">Right Issue of Shares: Step by Step Procedure <\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>This blog&nbsp;discusses the various&nbsp;types of shares\/securities available to Private Limited Companies. Shares, also known as securities under the Companies Act of 2013, are amongst the financial tools used to obtain revenue for a corporation. Shares are ownership interests in a business entity&nbsp;or financial assets that provide an equitable distribution of profits in the form of [&hellip;]<\/p>\n","protected":false},"author":13,"featured_media":36692,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[154],"tags":[1994],"acf":{"service_id":"1"},"authorName":"Soniya Khanna","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2023\/06\/MicrosoftTeams-image-23.jpg","authorDescription":"Soniya Khanna is a legal professional, known for her expertise in corporate law, intellectual property and contract negotiation. With over 7 years of experience in the legal field she regularly contributes to legal publications, shares her insights on emerging legal trends and provide practical advice to readers.","postViews":5218,"readingTime":5,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/36668"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/13"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=36668"}],"version-history":[{"count":20,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/36668\/revisions"}],"predecessor-version":[{"id":57955,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/36668\/revisions\/57955"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/36692"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=36668"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=36668"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=36668"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}