Introduction

In this article you will learn about " Difference Between Equity Share And Preference Share " in simple language so that you will be able to understand it. But first of all, you should know the meaning and concept of equity share and preference share because it will help you in understanding the further topics clearly. 

Meaning Of Equity shares

Companies usually issue two types of shares ( section 43 ) as authorised and permitted by Companies Act, 2013.These are preference shares and equity shares which are also known as Ordinary shares. According to section 43, " an equity share is one which is not a preference share ". Such shares do not enjoy any preferential rights as regard to payment of dividend or refund of capital. That's why these are known as ordinary shares. Equity shares  are of low face value as compare to preference shares. The equity shareholders are the last to claim in the assets of the company and entitled to residual surplus left after meeting the claims of Debenture holders, Creditors and Preference Shareholders. Equity shareholders carry voting rights. 

Equity shares are of two types:-

1. Equity shares issued by a company limited by shares to public or its members (section 43)
2. Sweat Equity shares [ section 2 (88) ]

Sweat Equity shares are issued by a company to its employees, officers, or whole time directors either at a discount or for consideration other than cash, for providing know-how or, making available rights in the nature of intellectual property rights or value addition, by whatever name called. According to section 2(88) , Sweat equity shares means equity shares which are issued by the company to its employees or its directors either at a discount or for consideration other than cash. The issue of Sweat equity shares is authorised by special resolution passed by the company in general meeting. 


Meaning Of Preference shares

Preference shares are those shares which enjoy preferential rights as regards payment of dividend during the life time of the company and repayment of capital in the event of liquidation. However, preference shareholders cannot compel or force a company to pay divided except in case where company has already paid equity dividend. This simply means that preference shares carry a right of dividend at a fixed rate before any dividend is paid on equity shares. These shares do not carry voting right. 

The preference shares are classified into following categories:-

  1. Cumulative Preference shares
  2. Non- Cumulative Preference shares
  3. Participating Preference shares
  4. Non- Participating Preference shares
  5. Redeemable Preference shares
  6. Irredeemable Preference shares
  7. Convertible Preference shares
  8. Non- Convertible Preference shares




Difference between Equity shares and Preference shares

1. Right to claim dividend- A preference shareholder has the right to receive dividend before any dividend is paid to equity shareholders. Equity shareholders don't have any preferential right with regards to dividend payment. 

2. Rate of dividend - preference shares carry pre- determined dividend rate which is fixed at the time of issue. Rate of dividend may vary year after year. The rate depends upon availability of divisible profits and the management policy. 

3. Arrears of dividend- preference shareholders have the right to claim arrears of dividend except when it is provided in the Articles. Question of arrears of dividend does not arise in case of equity shares. 

4. Right to vote and participation in management- usually, preference shares do not carry any voting right except in special circumstances and thus have no say in management. Equity shares always enjoy voting rights and have their say in managerial affairs. 

5. Capital structure- A company cannot have any preference shares in its capital structure. Hence a company cannot be formed with preference shares only. A company may have only equity shares in its capital structure and it can be formed with equity shares alone. 

6. Redemption- preference shares are redeemable on or before the stipulated period of time as per terms of issue. The stipulated period cannot exceed ten years in any case. Equity shares are always irredeemable. However, on liquidation they are entitled to surplus or residuary assets of the company.