DIFFERENT CLASSES OF SHAREHOLDERS

5.3 CORPORATE LAW I

Submitted by:

Satyam Verma

UG16-42

Submitted to:

Ramesh Kumar (Professor of Law.)

MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR

 TABLE OF CONTENTS
INTRODUCTION .......................................................................................................................... 1
RESEARCH METHODOLOGY ................................................................................................ 1
RESEARCH AIMS AND OBJECTIVES ................................................................................... 1
RESEARCH SCOPE AND LIMITATIONS .............................................................................. 1
DIFFERENT TYPES OF SHAREHOLDERS ............................................................................... 2
1.Common/Equity Shareholders ................................................................................................. 2
2.Preferred Stockholders ......................................................................................................... 3

When the Company is in Distress ............................................................................................... 8

HOW SHARES ARE MADE PUBLIC FOR THE FIRST TIME ................................................. 9
1. Initial Public Offering (IPO) ........................................................................................... 9

2. Book Building Process .................................................................................................... 9

TRADING IN THE STOCK MARKET....................................................................................... 10

1. Primary Market ............................................................................................................. 10

2. Secondary Market ......................................................................................................... 10

TYPES OF SHARES .................................................................................................................... 11

1. Ordinary shares ................................................................................................................. 12
2. Deferred shares ................................................................................................................. 12
3. Non-voting shares ............................................................................................................. 12
4. Redeemable shares ............................................................................................................ 13
5. Preference shares .............................................................................................................. 13
6. Management shares ........................................................................................................... 13
7. Alphabet shares ................................................................................................................. 14
Alphabet shares are a subclass of ordinary shares, which allow a company to vary the the
rights attached to shareholders. ................................................................................................. 14
Why Do Companies Issue Shares & Why Do Investors Buy Them............................................. 15
preference Shares .......................................................................................................................... 17
ordinary Shares ............................................................................................................................. 17
THE SIGNIFICANCE OF SHARES............................................................................................ 18
1. Capital Growth .............................................................................................................. 18
 2. Dividends ...................................................................................................................... 18

3. Liquidity........................................................................................................................ 18

4. Shareholder Benefits ..................................................................................................... 18

RISKS ASSOCIATED WITH INVESTMENT IN SHARES ...................................................... 19

1. Volatility ....................................................................................................................... 19

2. Credit Risk .................................................................................................................... 19

3. Unexpected Events........................................................................................................ 19

CONCLUSION ............................................................................................................................. 20
INTRODUCTION
Shares are units of ownership interest in a corporation or financial asset that provide for an equal
distribution in any profits, if any are declared, in the form of dividends. The two main types of
shares are common shares and preferred shares. Physical paper stock certificates have been
replaced with electronic recording of stock shares, just as mutual fund shares are recorded
electronically.1When establishing a corporation, owners may choose to issue common stock or
preferred stock. Most companies issue common stock. The stock may benefit shareholders
through appreciation and dividends, making common stock riskier than preferred
stock. Common stock also comes with voting rights, giving shareholders more control over the
business. In addition, certain common stock comes with pre-emptive rights, ensuring that
shareholders may buy new shares and retain their percentage of ownership when the corporation
issues new stock.
In contrast, preferred stock typically does not offer appreciation in value or voting rights in the
corporation. However, the stock typically has set payment criteria; a dividend that is paid out
regularly, making the stock less risky than common stock. Also, preferred stock may often be
redeemed at a more beneficial price than common stock. Because preferred stock takes priority
over common stock, if the business files for bankruptcy and pays its lenders, preferred
shareholders receive payment before common shareholders.2

RESEARCH METHODOLOGY

Doctrinal Method of research has been used.

RESEARCH AIMS AND OBJECTIVES

The aim of the paper is to discuss the various classes of shares.

RESEARCH SCOPE AND LIMITATIONS

The research is extended to but not limited by a comprehensive discussion on shares.

1
https://www.investopedia.com/terms/s/shares.asp#ixzz5QOpZZKa0
2
https://www.investopedia.com/terms/s/shares.asp#ixzz5QOpnsfvV

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DIFFERENT TYPES OF SHAREHOLDERS3

By the simplest definition, a shareholder is any person or institution that owns one or more
shares of a company's stock. Not all shareholders are created equal, however. While some get to
vote on key corporate decisions and receive dividends when the company is profitable, others are
passive investors who receive a fixed return for their investment every year, rather like the
guaranteed interest rate on a loan. There are two categories of shareholders who own either
common or preferred shares.

1.Common/Equity Shareholders

Many companies only have one type of share, known as common stock. As such, most
shareholders are common or "ordinary" stockholders and when you read about share valuations,
this is usually what is meant. Common shareholders have an ownership stake in the company.

Common shareholders also have the right to file a class action lawsuit against the company if
there is an act of wrongdoing that potentially harms the company or negatively affects the value
of its common shares. This enables them to exercise considerable control over how the company
is managed and how it handles strategies for growth.

Merits of Equity Shares

• Equity capital is the foundation of the capital of a company. It stands last in the list of claims
and it provides a cushion for creditors.
• Equity capital provides creditworthiness to the company and confidence to prospective loan
providers.
• Investors who are willing to take a bigger risk for higher returns prefer equity shares.
• There is no burden on the company, as payment of dividend to the equity shareholders is not
compulsory.

3
C.R. DATTA, DATTA ON THE COMPANY LAW 29 (2008) pg 1.902

2
• Equity issue raises funds without creating any charge on the assets of the company.
• Voting rights of equity shareholders make them have democratic control over the management
of the company
Now let’s understand what limits the company from raising them:

Limitations of Equity Shares

• Investors who prefer steady income may not prefer equity shares.
• The cost of equity shares is higher than the cost of raising funds through other sources.
• The issue of additional equity shares dilutes the voting power and earnings of existing equity
shareholders.
• Many formalities and procedural delays are involved and they are time-consuming processes

2.Preferred Stockholders

Preferred stockholders own a different type of share known as preferred stock. These
shareholders have no voting rights, which means they cannot influence management decision-
making. What they do have, is a guaranteed right to be paid a fixed amount of dividend every
year, and to receive this payment before the company pays a dividend to common shareholders.
The amount of dividend is fixed or attaches to a specified interest rate; for example, a $10, 5-
percent preference share would pay an annual dividend of 50 cents.

Both common stock and preferred stock can go up in value if the company is doing well.
However, common stock is more volatile and tends to experience much larger capital gains – or
losses – than preferred stock. The right to receive a fixed dividend means that preferred stock
behaves more like debt than a common share. Investors who wish to generate a predictable
investment income – rather than ride the volatility of the stock market – typically choose to own
preferred shares.

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Benefits to Preference Shareholders4

• Repayment of capital, after payment of debt holders, if the company is wound up;
• Higher level of income for preference shareholders than debt holders because of a higher risk
involved, as preference shareholders are not always guaranteed a dividend payout;
• Preference shareholders have a better guarantee for a dividend payout than ordinary
shareholders because dividend payments are usually fixed;
Preference shareholders are guaranteed a specified percentage dividends if the company makes a
profit.

Types of Preference Shares5

There are different classes of preference shares. They are as follows:

• Cumulative Preference Shares.

• Non-cumulative Preference Shares.
• Participating Preference Shares.
• Non-participating Preference Shares.
• Convertible Preference Shares.
• Non-convertible Preference Shares.
• Redeemable Preference Shares.
• Guaranteed Preference Shares.

1. Cumulative preference shares

Shares which have the right of dividend of a company even in those years in which it makes no
profit are called cumulative preference share. The company must pay the unpaid dividends on
preference shares before the payment of dividends to equity shareholders.
If in any gear the company does not earn adequate profit, dividends on preference shares may not
be paid for that year. In case of cumulative preference shares, such unpaid dividend is treated as

4
https://www.jse.co.za/content/JSEEducationItems/PreferenceShares.pdf
5
https://efinancemanagement.com/sources-of-finance/types-of-preference-shares
4
arrears. The arrears will accumulate and they will be payable out of the profits of the subsequent
years. Dividend on other classes of shares can be paid only after the payment of such arrears. If
the Articles are silent, all preference shares are assumed to be cumulative preference shares.

2. Non-Cumulative preference shares

Non-cumulative preference shares are in contrast to Cumulative preference shares. Non-
cumulative dividends do not accumulate if they are not paid when due.
The dividend on these shares are payable only out of the profits of the current year. If in any year
the company does not earn adequate profit, the holders get no dividend or partial dividend. In
that case, the unpaid dividend will not be carried forward to subsequent years. The holder cannot
claim arrears of dividend.

3. Participating Preference Shares

The holders of Participating preference share receive stipulated rate of dividend and also
participate in the additional earnings of the company along with the equity shareholders.
During the lifetime of the company in addition to the fixed dividend, the shareholders of this
kind of shares have a right to participate in the surplus of profits, which remains after payment to
the equity shareholders. At the time of winding up in addition to their shares, the shareholders
have a right to participate in the surplus of assets, which remains after payment to the equity
shareholders. The surplus will be distributed between the participating preference shareholders
and equity shareholders in an agreed ratio.

4. Non-Participating Preference Shares

In practice, most preference shares are non-participating in nature. It means that preference
shareholders receive only stated dividend and no more. This is based on the fact that the
preference shareholders surrender their claim to extra earnings in lieu of their right to receive the
stated dividend.
The holders of non-participating preference shares have no right either to participate in the
surplus of profits, which remains after payment to equity shareholders (during the lifetime) or to
participate in the surplus of assets, which remains after payment to equity shareholders (at the
time of winding up).If the Articles are silent, all preference shares are treated as nonparticipating

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preference shares.

5. Redeemable preference shares6

According to Sec. 80 of the Companies Act, the preference shares, which can be redeemed after
a specified period or at the discretion of the company, are called redeemable preference shares.
Non-redeemable preference share is permanent in nature and its shareholding is continuous till
the company goes into liquidation. In this sense, the preference share resembles the equity share.
So, in order to attract the investor, a clause is included in the agreement for redeeming the
preference share after the expiry of a specified period.
The redemption of preference share is advantageous for the company. It acts as a hedge against
inflation. When the money rate declines, the company may redeem the shares and refinance it at
a lower dividend rate.

6. Non-redeemable preference shares

Redeemable preference shares are also called, at the option of the company. If this call is
exercised by the company, the investor must find alternative form of investment for investing the
sum he gets on the retirement of the shares. Investment in equity share is more profitable than
that of preference share.
Preference share holders do not participate, in the extra earnings of the company, except in the
case of participating preference shares.

7. Convertible preference shares

Convertible preference shares are those which are converted into equity shares at a specified rate
on the expiry of a stated period. The holders of this kind of shares have a right to convert their
shares into equity shares within a specified period.
For example, a 100 Rupee preference share may become convertible into 10 equity shares of
Rs.10 each.

8. Non-Convertible preference shares

6
www.finsia.com/docs/default-source/jassa-new/jassa-1983/redeemable-preference-share-
financing.pdf?sfvrsn=8aa1b393_2
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Convertible preference share may also have cumulative or participating rights. This kind of
preferred stock is ideal from the view point of the investor. Non-convertible preference shares
are not converted into equity stock. Non-convertible preference shares may also be redeemable.
The holders of this kind of shares have no right to convert their preference shares into equity
shares.

Memorandum of Association and Articles of Association:

The rights of preference shares must be mentioned in the Memorandum of Association and
Articles of Association.
• Preference shareholders cannot claim any other rights apart from those expressly mentioned in
the MOA or AOA.
• Companies cannot allot preference shares if they are not mentioned in the MOA or AOA of
the company.

Why do companies issue preference shares7

• Issuing equity shares would mean diluting ownership rights. Therefore, to safeguard
ownership rights, companies issues preference shares.
• Companies issue preference shares because they wouldn’t want to avail loans.
• Companies issue preference shares because they give maximum flexibility, without the fear of
missing interest payments. In case companies issue bonds, a missed interest payment puts
the company at risk of defaulting on an issue. This results in forced bankruptcy.

Why do investors like preference shares?

https://accountlearning.com/preference-shares-meaning-kinds-of-preference-shares/
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• Investors like to invest in preference shares because these shares enjoy preference over equity
shares, vis-a-vis dividends.
• Investors like banks and institutional investors like to invest in preference shares because they
want to avoid the risk of fluctuating equity share prices.
• Preference shares are a combination of equity shares and bonds. Therefore, these are relatively
stable.
• Shareholders prefer to invest in preference shares because it offers consistent dividend
payments minus lengthy maturity dates like bonds.
• Preference shares are less risky when compared to equity shares.

When the Company is in Distress

Besides voting rights, the major difference between common and preferred shareholders
becomes apparent when the company is in distress. While the company is not obligated to make
dividend payments to ordinary shareholders, it must still pay out on its preferred shares. When
there's no money in the coffers, the dividend becomes a liability which the company must honor
at some point in the future. In liquidation, preferred shareholders receive their share of the
company's assets after secured creditors and bondholders have been paid off but before common
shareholders receive a cent – that's why these shareholders are called "preferred." Common
shareholders are last in the chow line at feeding time. They receive nothing until all other claims
have been fulfilled.

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HOW SHARES ARE MADE PUBLIC FOR THE FIRST TIME

Shares are made public through an initial public offering using a book building process.

1. Initial Public Offering (IPO)

Initial public offering (IPO) is when a company issues common stock or shares to the public for
the first time. They are often issued by smaller, younger companies seeking capital to increase,
but can also be done by large privately-owned companies looking to become publicly traded.

In an IPO, the issuer gets the assistance of an underwriting firm, which helps in determining
what type of security is to be issued (common or preferred), the most suitable offering price and
the proper time to bring it into the market.

IPOs are a risky investment as it is tough to predict what the share will do on the trading day as
well as in near future because, there is no substantial historical data to analyze the company’s
standing. In addition to that the companies up for an IPO undergo a transitory growth period
which is subjected to uncertainty for future values.

2. Book Building Process

In order to raise money, a company plans on offering its stock to the public and this process is
called Book building process. This process is used either by an IPO (Initial public offering) or
FPO (follow-on public offers) for effective price discovery. It is a mechanism where, during the
tenure for which the IPO is open, bids are collected and compiled from investors at various
prices, which are higher or equal to the floor price (lowest price at which bids can be made). The
offer price is decided after the bid closing date. As soon as the cost of the stock is determined,
the issuing company can then decide upon the division of its stock to its bidders.

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TRADING IN THE STOCK MARKET

The most common way of buying/selling shares in stock market is via trading through
exchanges, where buyers and sellers meet and decide on a trading price. Through a stockbroker
you can buy shares from existing investors who wish to sell them and vice versa.

There are also some exchanges which are physical location known as trading floors, where often
trading is carried out. You might have come across in pictures where traders are yelling, waving
up their arms wildly in air. The other means of exchange is virtual and is carried out via a
network of computers where trading can be done electronically.

The aim of a stock market is to simplify the exchange of securities between buyers and sellers
which can in turn reduce the risks associated with investing. So a stock market can be considered
as a super-sophisticated market providing a linkage between buyers and sellers.

It’s important to have a sound knowledge between Primary and Secondary Market if someone
wishes to trade.

1. Primary Market

Primary market is where the securities are made via an IPO.

2. Secondary Market

Secondary market is where investors trade the already-issued securities without involving the
issuing companies. It is what people refer to when they are talking about the stock market.

An investor or stake holder have to trade through registered brokers/brokerage houses of the
stock exchanges and it doesn’t require the direct involvement of the company. Each stock
exchange has a number of brokers/brokerage houses which are registered with the commission.
Registered Brokers/brokerage houses are allowed to engage in execution of trade on others'
behalf as per the laws, rules and regulations. The following points are of key importance if you
are opting for trade.

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  To ensure protection against fraud and misrepresentation an investor should trade only
through registered brokers/brokerage houses and agents.
 To verify authenticity of brokerage house/brokers/agents registration, SECP has uploaded
a list of registered brokers and agents of the Stock Exchanges on its website8 It is
important to note that the registration of all the brokerage houses/brokers and agents are
valid for a period of one year which is subject to annual renewal.
 Make regular enquiries from your broker/
 If you come across any unregistered/illegal broker/agent, please report the same
immediately to the SECP as it is in your own interest and in the general interest of other
investors.
 The list of registered brokerage houses/brokers and agents can also be found on
respective websites of the Exchanges.

TYPES OF SHARES9

Authorized shares comprise the number of shares a company’s board of directors may issue.
Issued shares comprise the number of shares that are given to shareholders and counted for
purposes of ownership.

Because shareholders’ ownership is affected by the number of authorized shares, shareholders

may limit that number as they see appropriate. When shareholders want to increase the number
of authorized shares, they conduct a meeting to discuss the issue and establish an agreement.
When shareholders agree to increase the number of authorized shares, a formal request is made
to the state through filing articles of amendment.)

It's common for companies to have different classes of shares, each of them conferring different
rights to shareholders, such as voting power and the right to dividends or capital.

8
(www.secp.gov.pk).
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C.R. DATTA, DATTA ON THE COMPANY LAW 29 (2008) Pg.1.903

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 1. Ordinary shares

Most companies only have one kind of shares, called ordinary shares. Ordinary shares represent
the company’s basic voting rights and reflect the equity ownership of a company. Ordinary
shares typically carry one vote per share and each share gives equal right to dividends. These
shares also give right to the distribution of the company’s assets in the event of winding-up or
sale.

The rights attached to ordinary shares are generally defined in the Articles of association of the
company and/or in the shareholders agreement.

2. Deferred shares

Deferred shares carry fewer rights than ordinary shares and can include:

 shares in which dividends are only paid after all other classes of shares have been paid
 shares in which dividends are only paid after a certain date or event
 shares that are not tradable until a certain date - such shares are usually issued to
employees in order to give them a long term interest in the company and to increase their
loyalty, or
 shares which, in the event of insolvency, do not give their holders any rights until all
other shareholders are paid.

3. Non-voting shares

Non-voting shares do not give the holder any voting rights in the company. This means that the
holder is entitled to a portion of the company’s capital, but is not able to take part in its general
meetings.

Non-voting shares are mostly issued to employees or to family members of the main
shareholders. This class of shares allows the main shareholders to retain control of the company
whilst multiplying the number of shareholders.

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 4. Redeemable shares

Redeemable shares are shares that can be bought back by the company at some point in the
future. The redemption date can either be fixed in advance (eg 3 years from the date the share is
issued) or decided at the company's discretion. The redemption price is usually the same as the
issue price, but not necessarily.

Shares given to employees are often redeemable, so that the company can get its shares back if
the employee leaves. However, the ability to redeem shares is limited and is subject to specific
statutory requirements. For instance, the company may only redeem the shares out of
accumulated profits or the proceeds of a new issue of shares.

5. Preference shares10

Preference shares give their holder a preferential right to a fixed amount of dividend, meaning
that they will receive dividends ahead of ordinary shareholders. Preferred shareholders also have
a higher priority claim to the company’s assets in case of insolvency.

Because this class of shares carries many benefits and guarantees, it is mostly issued to investors,
for example to venture capitalists, who invest in startups. However, preferred shareholders do not
have the same ownership rights in the company as ordinary shareholders; they are often non-
voting and sometimes redeemable. Redeemable preference shares are a common way of
financing a business. They allow a company to repurchase its shares in the future (eg if interest
rates fall and the company wants to issue new shares with a lower dividend rate), while giving
investors the possibility to get their money back at a pre-agreed price.

6. Management shares

Management shares give their holders extra voting rights at the company’s general meetings (eg
two votes for one share). Such shares are often used to enable company directors to retain control
of the company in the event of shares being issued to outside investors.

10
Surya Kant Gupta v. Rajaram Corn Product Pvt. Ltd., (2008) 84 CLA 310 (CLB)

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 7. Alphabet shares

Alphabet shares are a subclass of ordinary shares, which allow a company to vary the the
rights attached to shareholders.

Although each class of shares can be given a descriptive name, eg non-voting shares, preference
shares or redeemable shares, it’s common to just label share classes with alphabet letters (A, B,
C, D, etc. depending on the number of subgroups a company wishes to create), each class
conferring different voting rights, rights to dividends and rights to capital.

Alphabet shares therefore enable companies to enhance or restrict certain shareholders’ rights.
For example, ''A shares'' can have a greater rate of dividend than ''B shares'', so that for the same
number of shares, owners of A shares receive more than owners of B shares.11

Other classes

Any class of shares may be created. Sometimes different classes are set up for particular
purposes, such as the following arrangements:

1. Voting shares, dividend shares, capital shares

Sometimes three classes of shares are created with class 'A' having all the voting rights, class 'B'
having all the dividend rights and class 'C' having all the capital rights. It is then possible for the
different shareholders to have different percentages of the rights for these purposes. As a simple
example, Shareholder 1 may have 40% of the voting rights ('A' shares), 50% of the dividend
rights ('B' shares) and 60% of the capital rights ('C' shares). Shareholder 2 then has 60% of the
votes, 50% of the dividends and 40% of the capital.

2. Deadlock articles

In a company with two investors, A and B (perhaps a joint venture between two unrelated
companies) the company may have two classes of shares, A shares and B shares. The shares may
carry the same rights but are intended to protect both A and B in certain ways, e.g. the articles
may provide for, say, two directors to be nominated by the holders of the A shares and two by
the holders of the B shares, etc.

11

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 3. Changing class rights

There is some statutory protection given to the holders of a class of shares against the rights on
their shares being altered. A minority class of shares, or a class of non-voting shares, would
otherwise be vulnerable to the rights on those shares being altered by the majority (e.g. by
altering the articles by special resolution). This is known as a variation of class rights. Full
consideration of this complex area is outside the terms of this database, but the following is a
summary of the main statutory provisions:CA 2006, sec630 provides that class rights may be
varied only in accordance with the articles or if either:(a) the holders of three-quarters in nominal
value of the issued shares of that class consent in writing to the variation; or(b)a special
resolution (75% majority) is passed at a separate general meeting of the holders of that class to
sanction the variation.CA 2006, sec633: The holders of not less than 15% of the issued shares of
the class (being persons who did not consent to or vote in favour of the resolution for the
variation), may apply to the court to have the variation cancelled.

Converting shares from one class to another

There is no statutory procedure for converting shares from one class to another. It may be done
with the consent of all the shareholders affected.The safest course is to pass a resolution to which
all the shareholders consent because, in practice, changing the rights on one person's shares may
well have an effect, at least in practice on the rights of all the other shareholder.

Why Do Companies Issue Shares & Why Do Investors Buy Them12

Many small businesses operate as corporations in the United States, because corporations
provide legal rights and protections that many business structures do not. A corporation is an
excellent structure by which a business can raise capital. Corporations are owned by their
shareholders, who may change over time, and they exist into perpetuity or until dissolved.
Companies issue shares and investors purchase those shares for a variety of reasons.

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https://smallbusiness.chron.com/companies-issue-shares-investors-buy-them-76649.html

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Recording Ownership Stake

Corporations issue shares to shareholder founders to record their ownership stake in the business.
Some corporations at startup issue sweat equity shares – shares provided at no cost or below fair
market value – to founders in exchange for services rendered. Founders often contribute cash for
shares soon afterward to capitalize the firm, which means they inject enough cash to cover the
short-term and medium-term costs of startup and operations.

Raising Start-up Capital

Early stage corporations issue shares to nonfounders to raise money to offset startup costs,
including attorney fees, rent, security deposits, insurance, marketing, product purchases, business
travel, equipment and furniture. Typically companies incur extensive startup expenses well
before they begin generating revenue.

Opportunities for Family and Friends

Founders try to cover startup costs with personal equity or loans, but when they need additional
funding beyond this, they typically turn to friends and family. Members of this investor group
often believe in the entrepreneur and her ability to make a company successful, and they can be
counted on for loyalty even when the company has little revenue and no profits. Friends and
relatives buy shares to support a loved one -- and to take a gamble at making money in the
process.

Expansion and Strengthening

Young corporations issue shares to external investors to raise money for expansion. Unlike debt,
equity does not require repayment and therefore does not stress a young or growing company’s
cash flow. In addition, equity strengthens the balance sheet. Prospective lenders generally prefer
to see a debt to equity ratio of one or lower. Young companies that aren't profitable or funnel
profits back into the company have no retained earnings. They must rely on share issuance to

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provide equity. Older, more stable corporations may issue shares to retire existing debt.

Building Wealth

Investors buy shares in small, private corporations to generate wealth for themselves in the form
of a return on their investment. That return comes from dividend distributions or profit retention
that increases share value. Investors examine the historical and projected financials -- revenue
growth, profit margins, return on equity -- as indicators of potential return. They review the
company’s goals and strategies. Investors often focus most on the management team that drives
the company’s accomplishments. When investors have the funds and believe they can generate a
healthy return, they will purchase stock in the company. Some investors invest larger sums to
obtain a larger ownership stake or a board seat that allows them to influence company decisions.
preference Shares ordinary Shares

Shareholders have a preferential right in Shareholders are entitled to dividends as

terms of entitlement to receipt of dividends well as residual economic value should the
as well as repayment of capital in the event company unwind (after bondholders and
of the company being wound up. preference shareholders are paid).

They offer shareholders a fixed dividend Ordinary shareholder dividends can be

each year. higher than preference shareholder
dividends as dividends for ordinary shares
are not fixed.

Shareholders have no voting rights and in

the event of non-payment of dividends may Ordinary shareholders have the right to
have a cumulative dividend feature that vote at Annual General Meetings and they
requires all dividends to be paid before any have the ability to elect the Board of
payment of common share. Directors of a company .

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THE SIGNIFICANCE OF SHARES13

There are many benefits to investing. Let’s find out how this common form of investment can be
an effective way to make money. Here are some of the benefits of investing in shares.

1. Capital Growth
Selling a share for more than you paid for it is known as Capital Gain. This occurs when
an individual experiences significant rise in share prices and is one of the long term
objectives of investing in shares.

2. Dividends

Dividend is a cash reward given out to shareholders as part of the profit made by the
company at the end of each financial year. The larger the units of the shareholdings one
possesses, the more money one receives.

3. Liquidity

By nature, shares that are listed are a very liquid product and can be bought and sold
quickly over an exchange platform. No hassle of involving a broker or transferee and at a
relatively low cost as compared to other financial products. Trading on an exchange also
allows one to sell part of the share parcels other than redeeming the whole lot.

4. Shareholder Benefits

Some listed shareholder companies from different market sectors including

entertainment, retail, hospitality and financial services offer lavish discounts to
shareholders when they buy goods or services from the companies or their affiliates.
However in most scenarios, lots of shares need to be owned to qualify for such benefits.

13
https://www.investopedia.com/ask/answers/05/pricechangeaffectcompany.asp#ixzz5UlQzuznE
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RISKS ASSOCIATED WITH INVESTMENT IN SHARES14

Shares can be a sound long-term investment but of course there are always risks to be considered
as with any type of investment. These include the following:

1. Volatility

Share values can be volatile and can fall dramatically in price, even to zero.

2. Credit Risk

Owners of ordinary shares are generally the last in the line of creditors if a company fails
and there may be no chance of getting any money back.

3. Unexpected Events

Unexpected events which are outside of your control, such as company specific bad
news, a change in government policy or natural or man-made disaster can seriously affect
share prices.

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C.R. DATTA, DATTA ON THE COMPANY LAW 29 (2008) Pg.1.8393

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CONCLUSION
A share is a right to a specified amount of the share capital of a capital of company carrying with
that certain rights and liabilities while the company is a going concern and in its winding up. A
share holders who buys shares does not buy an interest in the company is that on by an investor
becomes entitled to participate in the profits of the company if and when the company declares,
subject to article, that the profits or any proportion thereof should be distributed by way of
dividends among the shareholders. He has undoubtedly for the right to participate in the assets of
the company which would be leftover after winding up. The shares or other interest of any other
member in a company a personal estate transferable in the manner provided by its articles, and
are not of the nature of real estate. The company which owns the property and not the
shareholder. The shareholders are not in the eyes of the law part owners of the undertaking. The
shareholders in the company are not partners inter se.15

15
Mrs. Bacha F. Guzdar v. CIT AIR 1955 SC74

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