Section 43 of the Companies Act, 2013 – Understanding the Types of Share Capital

Section 43 of The Companies Act, 2013 reads as –

Kinds of share capital

The share capital of a company  limited by shares shall be of two kinds, namely:—

(a) equity share capital—

(i) with  voting right ; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and

(b) preference share capital: 

Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of this Act.

Explanation.—For the purposes of this section,—

• “equity share capital”, with reference to any company limited by shares , means all share capital which is not preference share capital;
• “preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and

(b) repayment, in the case of a winding up or repayment of capital, of the amount of the  share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the  memorandum  or  articles  of the company;

• capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:—

(a) that in respect of dividend , in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;

(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

Exceptions/ Modifications/ Adaptations

^1. In case of private company – section 43 shall not apply where memorandum or articles of association of the private company so provides. – Notification dated 5th june, 2015.

^2. In case of Specified IFSC Public Company – section 43 Shall not apply to a Specified IFSC public company, where memorandum of association or articles of association of such company provides for it. – Notification Date 4th January, 2017

The Companies Act, 2013, is a comprehensive legal framework that governs corporate entities in India. Among its many provisions, Section 43 plays a crucial role in defining the different types of share capital a company limited by shares can issue. Share capital represents the ownership structure of a company and is fundamental to raising capital, attracting investors, and ensuring compliance with legal and regulatory requirements.

Section 43 outlines two primary categories of share capital that companies limited by shares can issue:

1. Equity Share Capital
2. Preference Share Capital

Each category has specific features, rights, and regulatory requirements that companies must adhere to while issuing shares.

1. Equity Share Capital

Equity share capital represents the primary ownership in a company. Equity shareholders are considered owners of the company and have voting rights, enabling them to participate in decision-making processes such as appointing directors, approving mergers, and determining corporate policies.

Types of Equity Share Capital

As per Section 43, equity share capital is divided into two subcategories:

(A) Equity Shares with Voting Rights

• These shares provide shareholders with the right to vote on important company matters.
• Voting rights are typically proportional to the number of shares held (one share = one vote).
• Equity shareholders receive dividends based on the company’s performance and only after preference shareholders have been paid.
• They also bear the highest risk, as they are the last to be paid in case of liquidation.

(B) Equity Shares with Differential Rights

• These shares have varying rights concerning dividends, voting, or other benefits as per the company’s Articles of Association.
• Some companies issue shares with higher dividends but limited or no voting rights.
• This structure enables promoters and founders to raise capital without diluting their control over the company.
• The Companies (Share Capital and Debentures) Rules, 2014, state that shares with differential voting rights must not exceed 26% of the total paid-up equity share capital of a company at any given time.

Significance of Equity Share Capital

Equity shares empower shareholders by granting them voting rights in corporate decisions, allowing them to have a say in the company’s strategic direction. They also provide companies with long-term financing, as equity capital does not need to be repaid like debt capital, reducing financial pressure on the business. Additionally, equity shares offer investors the potential for high returns, as shareholders directly benefit from the company’s growth and profitability, making them an attractive investment option.

However, equity shareholders also face greater financial risks, as their returns depend on the company’s profitability, and they receive payouts only after other obligations (such as debt and preference share dividends) have been met.

2. Preference Share Capital

Preference shares, as the name suggests, grant preferential rights over equity shares in two key aspects:

1. Dividends: Preference shareholders receive fixed dividends before any dividend is paid to equity shareholders.
2. Capital Repayment: In case of liquidation, preference shareholders have a higher claim on company assets than equity shareholders.

Types of Preference Share Capital

(A) Cumulative vs. Non-Cumulative Preference Shares

• Cumulative Preference Shares: If the company skips dividend payments in a given year, these unpaid dividends accumulate and must be paid before dividends are distributed to equity shareholders.
• Non-Cumulative Preference Shares: If the company fails to declare dividends in a particular year, preference shareholders lose the right to claim it later.

(B) Participating vs. Non-Participating Preference Shares

• Participating Preference Shares: These shareholders have the right to receive additional profits if the company performs exceptionally well after paying dividends to equity shareholders.
• Non-Participating Preference Shares: These shareholders only receive fixed dividends and do not participate in extra profits.

(C) Redeemable vs. Irredeemable Preference Shares

• Redeemable Preference Shares: These are issued with a fixed maturity period, after which the company buys them back.
• Irredeemable Preference Shares: These shares do not have a fixed repayment date and remain active unless the company is liquidated.

Regulations on Preference Shares

The Companies Act, 2013, restricts the issuance of irredeemable preference shares. Redeemable preference shares must be redeemed within 20 years from their issue date, except in specific cases like infrastructure projects.

Regulatory Framework and Compliance Requirements

The issuance of shares, especially those with differential rights, is governed by the Companies (Share Capital and Debentures) Rules, 2014. Companies must adhere to these compliance requirements to ensure transparency and protect investor interests.

Before issuing shares with differential voting rights, companies must obtain approval from shareholders through a special resolution passed in a general meeting. This ensures transparency and shareholder participation in key decisions.

Additionally, companies must meet minimum track record requirements, including a history of profitability for the past three years and a clean record with no defaults on dividend payments, statutory dues, or loan repayments. Companies that have defaulted on these obligations are restricted from issuing differential voting shares, reinforcing financial discipline and investor protection.

For publicly listed companies, compliance with SEBI regulations is essential. They must adhere to listing and disclosure requirements to ensure transparency and accountability when issuing equity and preference shares on stock exchanges.

Failure to comply with these regulations can result in penalties, legal consequences, and restrictions on future capital raising activities.

Challenges and Considerations

While Section 43 provides flexibility for companies in structuring their share capital, certain challenges arise:

The issuance of differential voting shares is often avoided by companies due to the complexities arising from regulatory requirements and restrictions. As a result, many businesses opt for traditional equity shares, which are more straightforward to issue and manage.

Preference shares also face limited market appeal, as investors generally favor equity shares for their potential to generate higher returns. While preference shares offer fixed dividends, they provide limited opportunities for capital appreciation, making them less attractive to many investors.

Additionally, companies must navigate significant regulatory and compliance burdens when issuing different classes of shares. Ensuring proper governance requires substantial investment in legal and financial compliance, adding to the overall cost and complexity of the process.

Another concern is the potential risk for minority shareholders. The issuance of shares with differential voting rights can lead to a concentration of control in the hands of a few, which may negatively impact the interests of minority investors, raising concerns about fairness and corporate governance.

Conclusion

Section 43 of the Companies Act, 2013, plays a crucial role in defining the structure of share capital in Indian companies. By classifying share capital into equity shares and preference shares, it provides companies with a framework to raise capital effectively while maintaining transparency and protecting investor interests.

While equity shares offer higher returns and voting rights, preference shares provide stability and fixed dividends. Companies must carefully consider their capital structure and regulatory requirements to balance growth, investor confidence, and corporate governance.

In a dynamic business environment, companies must continue adapting to market trends and legal frameworks to ensure compliance and sustainable growth while protecting shareholders’ interests.

Bibliography

• ICSI-CCGRT – “GEETA SAAR” – A Brief of Premier on Company Law
• Section 43, The Companies Act, 2013
• Ramaiya, Guide to the Companies Act (19th ed. 2020)
• T Ramappa, Commentary on the Companies Act, 2013 as Amended by the Companies (Amendment) Act, 2015

This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions. For expert assistance, feel free to contact us.