Types of shares/securities for private limited companies

Last Updated at: Jun 23, 2020
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shares and securities
A private limited company’s value is divided by its shares, and it can be of different types. One of the most commonly discussed types of shares is equity. So if you have a share of the company, then you own a part in the company. Private Limited Companies offer different instruments to bring investment in the company, and shares are one of them.

 

A company’s value is divided by its shares, which can be of several types further than just the one most frequently discussed i.e., equity. So even though when you own any type of share, you own a piece of the private limited company. In this blog, we will discover the rights that come with a particular share.

Equity shares:

The most common type of share, all equity is treated equally. So if you own equity in a company, your shares have all the voting and other rights inherent in them. In the US, it is called common stock.

Equity shares with differential voting rights:

Such shares are usually issued to founders or CEOs, so that they may have greater control over day-to-day affairs of the company. Google and Facebook are two companies known to issue such shares, which give higher voting rights to certain classes of investors. However, in India, to issue such shares, you must show that you are capable of distributing dividends for three years.

Preference shares:

These are, as stated, preferential. The advantage of holding a preferential share is that, in case of liquidation of the company, the preferential shareholders will be paid out first, once all debts of the company are settled. Only once this is done will common stockholders be paid out. These shareholders are also frequently paid out by shareholders separately from different equity shareholders. However, preference shares don’t have voting rights.

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Types of Preference Shares:

  1. Cumulative of Non-cumulative:

A non-cumulative or simple shared preference provides a right to a dividend of each year that is decided by the percentage of profit. If due to a lack of profit, no dividend is claimed in any year, the holders of the preferred shares shall not be allowed to obtain an unpaid dividend in the following year or years in the regard that year. In any year in the years to come or years where profits are available to be distributed, cumulative preferred shares still give priority shareholders the right of claim for an unpaid dividend. In this case, when the profits are available, dividends that are not compensated each year are accrued and paid out.

2. Redeemable and Non-redeemable

Redeemable preference shares that are redeemable are preference shares that must be reimbursed by the company. This is done after the term for which the preference shares are issued.    Irredeemable preferences mean that the company does not have to pay back preference shares except when the company has been closed. The Indian Company Act, however, prevents a company from producing irredeemable preference shares. If a business is unable to redeem any preferential shares within a set period, the firm may issue redeemable preferential shares, with the approval of the Law board of the company, equivalent to the redeeming of those old preferential shares that can be redeemed on a fixed date or within a certain duration of 10 years from the start, given that this includes the following terms and conditions:

  • The share can only be redeemed if it is fully paid.
  • To make such an issue, it must be certified by the articles of association.
  • In the case of a premium payable in respect of redemption, it must have made proceeds, profit or premium accounts available before the shares are reimbursed.
  • The sharing can be redeemed from the company’s profits. It can also be redeemed from any dividends or earnings or new shares issued to resell shares.
  • When the shares are redeemed from profits, they must be transferred from capital reserve account profits, equal to the nominal amount of the shares being redeemed. This sum should be used to reimburse redeemable preference shares. This reserve can be used to give the members of the company full paid bonus shares.

3. Participating preference share or non-participating 

A preferential dividend at a fixed rate shall be permitted the participating preferential shares which are entitled to further take part in profits either with or after the payment of a certain equity share dividend rate. A non-participating share has no right, after the payment of the dividend and the capital to preferential shareholders, to be part of the company ‘s profits.

ESOPs

A common problem that most entrepreneurs face is how to motivate their employees in a mutually beneficial way. The most practical solution to this is the Employee Stock Options Plan (ESOP) used by small and large businesses alike. It keeps your deserving employees motivated to grow the company. it also ensures that you don’t lose them for several years. Companies provide stock ownership to their employees in an ESOP. This is done often at no upfront cost but in the place of the work they do. Shares are allocated to employees but granted only after a pre-defined period. It cannot be given to freelancers, promoters, consultants, etc.

 

shares/ securities for private limited companies