The Company Ordinance defines share as “a share in the share capital of the company” It represents equal portions into which ‘the capital is divided. Each of these portions is called a share of the company.
A public company generally issues various classes of shares in order to satisfy the requirements of different investors. The powers and rights of various classes of share are laid down in the Articles and Prospectus of the company.
Kinds of Shares
Ordinary Share
These shareholder have no special rights in regard to dividend. They are entitled to participate in the profits earned by the company after the payment of fixed dividend to preference shareholder.
Deferred Share
These shares are issued to promoters who take initiative in the formation of the joint stock company. So these are also called “Founder’s Shares”. Some times such shares are allotted to vendors as fully or partially settlement of the purchase price of the business.
These are usually valuable shares, as these may have an entitlement to participate in all profits remaining after the payment of shares.
Preference Share
These shareholders have preferential rights or privileges in respect of the payment of dividend or repayment of capital in the event of winding up of the company. They are entitled to receive a fixed rate of dividend out of the profits of the company in priority to other share kinds.
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Different Types of Preference Shares
Cumulative Preference Shares
These shares have additional privileges in regard to payment of dividend. If the profits of anyone period are insufficient to pay their fixed dividend, the right to such dividend accumulates until all arrears of unpaid dividend due to them have been satisfied in full.
Non Cumulative Preference Share
Such shareholders are entitled to a fixed rate of dividend out of the current year’s profit. If the profits are not available for distribution, the arrears of unpaid dividend are not carried toward to subsequent years.
Participating Preference Shares
The holder of such shares are entitled to preference dividend at fixed rate arid to participate further in surplus profit after all the other shareholders have received a specified rate of dividend. In the absence of written provisions, preference shares are deemed to be non-participating.
Redeemable Preference Shares
A public company may issue these shares if so authorized by its Articles. Such shares are fully paid up before redemptions. The repayment of these shares is made by creating a Reserve fund or out of the proceeds of a fresh issue of shares made for the object of the redemption.
Guaranteed Preference Shares
These shares are for a fixed rate of dividend by third party. If the profits of any one year are not sufficient to pay such dividend, the guarantors have to pay the same of their private resources.
The Difference in Shares & Debentures
| Shares | Debentures |
| Represents a share in the share capital of the company | represents the acknowledgement of debts of the company |
| Shares holders are the owners of the company | Actually they are not owners but are considered as creditors of the company |
| They have the right to participate in the management of the company thought Board of Directors. | The cannot conduct the management of the company neither directly not indirectly. |
| Shares holders have got right to participate in the profit of the company at the specific or variable rate. | Debentures holder have got right to enjoy interest at the fixed rate. |
| The shareholders cannot withdraw their share capital unless the company goes into liquidation or decides to reduce its share capital | The amount of the debenture is returnable after the expiry of the specific period. |
| The process of distribution of point or loss among the shareholders may be justified in Islam. | As debenture holders have to receive interest in every case irrespective of the profit or loss it cannot be justified in Islam |
| The rights and power of the shareholders are laid down in Articles of Association. | The rights and power of debenture holder are mentioned in the certificate, issued at the time of accepting loans |
| Shareholders have got second right in regard to the repayment of capital if there is any balance at the time of winding up of the company. | In case of liquidation debenture holders have first right to get back their amount from the company. |
| As the shares are not issued against the charge of any property of the company so these are considered unsecured | As the assets of the company may be charged against the loans, so debentures are regarded secured security. |
Difference Between Share & Stock
STOCK: It is a fractional part of the capital of the company. It cannot be issued directly. But it can only be created out of fully paid up shares. This can be done (a) if authorized by the Articles of Association (b) By resolution of the company in the general meeting of the shareholders
| Shares | Stock |
| Means a share in the share capital of the company. It is single unit into which the capital is divided | It is a fractional amount of the capital of the company. But it includes group of shares into which the capital may be divided |
| Share represents share holders of the company and in respect to this share certificate is issued to each | Stock represents stock holders of the company and in respect to this stock certificate is issued to each stock holders |
| Shares must bear distinctive numbers | Stocks are not numbered |
| It may be fully paid or partly paid | It must be created out of fully paid shares |
| A share cannot be further divided into small portion. It can be issued and transferred in term of complete share | It is divisible and it can be issued and transferred in fractional unit |
| Each share has a definite face value | Each stock may have any face value |
| It can be issued directly to raise capital of the company | It cannot be issued directly for any purpose |
Important Note
The above-mentioned types of shares have been described in the company Act 1913, But according to section 90 (I) of the companies ordinance 1984 “A company limited by shares shall have an only ordinary share capital, which may be sub-divided into different classes.
Provided that this sub-section shall not apply to preference shares issued before the commencement of this ordinance or in pursuance of a contract or agreement entered into before such commencement”.
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