Last Updated on June 18, 2024 by Kanakkupillai
In addition to common shares, private limited companies in India can provide other types of ownership. Although common shares are a popular option, citizens of India have a variety of other options. Examples include redeemable or non-redeemable preference shares, cumulative or non-cumulative preference shares, and equity shares with different voting rights. Additionally, preference shares with and without participation exist, each with unique characteristics. It is important to choose an ownership structure that fits the goals of the organisation, risk tolerance, and long-term plan. Guidance from Indian Corporate law experts would help you make wise decisions.
Primary Share Types in Private Limited Company
Types of Shares a Private Limited Company Issues Typically
1. Equity Shares
Equity shares are most commonly and widely used in a private limited company. The Companies Act of 2013 states that all the shares except the preferentially used shares are considered to be equity shares.
Equity shares treat each stakeholder equally. As a result, in addition to other inherent advantages, you have full voting rights if you buy shares in a business. Additionally, there are no special advantages for dividend distribution or capital repayment for equity shares. In comparison to preference shares, they are inherently riskier.
Variable voting rights attached to equity shares
Private limited company founders or CEOs frequently receive equity shares with changeable voting rights, which gives them more influence over the day-to-day management of the business. Additionally, certain investment groups are granted additional voting powers through these shares.
Google and Facebook are two well-known examples of corporations that have issued such shares. However, in India, the issue of such shares requires proof of a company’s capacity to consistently distribute dividends for at least three years in a row.
2. Preference Shares
As their name implies, preference shares are distinguished by receiving special treatment. The primary advantage of having preference shares is that its owners will receive payment in the event of the company’s insolvency before any other corporate debts are resolved.
Payment to the preference shareholders will precede payment to the ordinary stockholders, who are the equity owners. In contrast to common shares, which lack such assurances or preferred rights, preference shares further provide a set or established dividend rate. As a result, preference shares are less harmful than equity shares. It’s crucial to note that preference shareholders frequently do not have voting privileges.
Types of Preference Shares
- Cumulative and Non-Cumulative
Shareholders with non-cumulative preference shares are entitled to an annual dividend that is calculated as a proportion of corporate profits. The holders of these preferred shares do not have the right to ask for the unpaid dividend in the following years for that specific year if no dividend is announced in a given year due to inadequate profitability.
On the other hand, cumulative preference shares have a unique structure. Any unpaid dividends from previous years may be accumulated by priority shareholders, who may then utilise them in later years when the company has profits to distribute. Owners of cumulative preference shares essentially receive the total of all unpaid dividends from prior years when revenues become available. Even in cases when dividends were not paid in prior years, this approach guarantees that stockholders who own cumulative preference shares would receive their payments.
- Differentiating Redeemable and Non-redeemable Preference Shares:
Shares with a predefined requirement for the firm to repurchase them after a predetermined period are known as redeemable preference shares, also known as callable preferred stock. Once the specified time for which these preference shares were first issued has expired, this repurchase, or redemption, takes place. In essence, the business agrees to purchase these shares from shareholders at a later time.
Redeemable preference shares are shares that cannot be redeemed; in the event that specific criteria are met—typically related to the company going down—the company is not required to buy back these shares. It is imperative to bear in mind that in India, firms are prohibited from issuing redeemable shares according to the Firms Act of 2013.
The organisation that offers redeemable preference shares may enhance their control over debt challenges and capital structure. Regulatory restrictions prevent non-redeemable preference shares from being issued as frequently, even if investors find them trustworthy. In view of their long-term financial goals and capital needs, firms must carefully weigh the options for their shareholders between redeemable and non-redeemable preference shares.
- Participating and Non-participating Preference Shares
Separating preference shares into participating and non-participating shares allows owners to choose from various financial structures.
Participating Preference Shares: In addition to a fixed dividend rate, participation preference shares provide investors with a share of a company’s profits over a predefined threshold. They are perfect for investors who want to connect their interests with profitable companies, giving them a second stream of income. Preference shares that do not participate in market trading offer investors fixed dividends at fixed rates, which helps them strike a compromise between better returns and predictable income security.
Importance of ESOPs
In the corporate world, employee stock ownership programs, or ESOPs, are essential for motivating and retaining exceptional people. By offering workers a share in the company’s success, they incentivise them and match their interests with the company’s. In the end, this shared ownership benefits the employees as well as the company by encouraging dedication and productivity. With vesting provisions that mandate employees stay with the company for a predetermined amount of time, ESOPs are also employed for long-term employee retention. Usually, only regular employees have access to them; stakeholders who are not employees cannot.
Conclusion
In India, Kanakkupillai is a well-known company with an emphasis on offering knowledgeable counsel and qualified assistance with business structuring, notably for private limited companies. Kanakkupillai provides thorough advice to company owners and entrepreneurs looking to improve their financial structure by using a team of seasoned specialists with a thorough grasp of Indian corporate rules and regulations. Our wide variety of services includes assisting businesses in choosing the best ownership structure, an essential component of forming and effectively running a company. The knowledge and expertise offered by Kanakkupillai’s specialists are helpful when making decisions concerning share kinds, such as equity or preference shares, or when implementing strategic Employee Stock Option Plans (ESOPs) to motivate and retain workers.
Kanakkupillai works closely with customers to make sure that their capital model is in line with their company objectives, complies with regulatory requirements, and maximises operational efficiency. This is because we are aware of the complexity of corporate finance and the legal environment in India. Kanakkupillai is a reputable and trustworthy source for business owners and entrepreneurs looking for professional assistance in creating the best financing model for their private limited company. We can help our customers realise their financial and operational goals by deftly navigating the intricate Indian company rules and regulations.
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