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Shareholder Types

Introduction of Shareholder

Every company gathers finance through two sources – internal and external. Internal source i.e. members of the company and external sources such as financial institutions, banks, etc. in the form of loans. Over here, we will talk about the internal source i.e. the capital raised through members of a company.

Generally, any person becomes a member of a company by acquiring shares of the same. Now, what does a share mean? A company divides its capital into shares of various denominations. For example, if a company has a capital of Rs. 100,000/-, then it can be divided into 1000 shares of Rs. 100/- each (1000*100=100,000).

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Types of Shareholder

There are two major types of shareholders: equity shareholders and preference shareholders. Both of them have their own specific rights and obligations towards the company.

Types of Shareholder

1. Equity Shareholders

Equity Shareholders refer to those shareholders who actively participate in the important decisions of the company and also bear a greater risk as compared to other kind of shareholders which entails greater profits in case a company gains and suffering losses if the company does not fare well in business in a particular period.

Equity shareholders enjoy the following benefits:

  • They get the right to participate in the major decisions taken by the company through voting.
  • Their liability is limited to the value of the shares held by them.
  • They are entitled to various benefits the company offers from time to time namely bonus shares, right shares etc.
  • They are entitled to dividends and profits of the company they invest in.

2. Preference Shareholders

Preference Shareholders are those shareholders whose decision making powers in the company are limited, but who have a preferential right over the profits earned by a company above the equity shareholders in the form of a percentage (generally fixed), which the company is obliged to pay irrespective of whether it has sufficient profits to pay them or not.

Preference shareholders enjoy the following benefits:

  • They get preference at the time of payment of dividends.
  • At the time of liquidation of a company, the preference shareholders’ dues are paid in priority to other shareholders.
  • In case of cumulative preference shares, in case a company misses to pay dividends in a particular year, the same gets accumulated and is paid in subsequent years.

The sub types of Preference shareholders are mentioned below:

  • Convertible and Non-Convertible Preference Shareholders: Convertible Preference shareholdershave an option/right to convert their shares into equity shares after a certain period on fulfilling certain terms and conditions. However, Non-Convertible shareholders don’t possess any such rights.
  • Redeemable and Irredeemable Preference Shareholders: A company has an obligation to pay back the capital in case of Redeemable Preference shares which consequently results in discontinuation of payment of dividends(preferential right on such shares). In case of Irredeemable Preference shares, the company pays dividend till it continues to exist and does not pay back the capital to such shareholders.
  • Cumulative and Non-Cumulative Preference Shareholders:In a case where a company is not able to pay dividends to preference shareholders in case of lack of funds, it gets accumulated for next financial year in case of Cumulative Preference Shareholders. To the contrary, Non-Cumulative Preference shareholders lose their right to receive dividends, if a company fails to pay the same in a particular financial year.
  • Participating and Non-Participating Preference Shareholders:Participating Preference shareholders have an additional right to participate in the decisions of the management of the company and thus, they are entitled to additional rights over profits of the company, whereas Non-participating Preference Shareholders don’t have any such rights.

From the above discussion, we can conclude that there are two types of shareholders: Equity and Preference. Acquiring any of them has its own pros and cons. Equity shareholders get a right to participate in the decisions of the company and have the power to govern the business and eventually change the course of it. The lop side of it is that they have to bear a higher risk and can also go on without even earning a penny if the company suffers losses in a particular financial year. On the other side, Preference shareholders play safe. They don’t get rights in particular, to participate in important business decisions. Even if they are not satisfied with the flow of business, they can’t object to it. However, they get a definite percentage of profits no matter how the company fared in terms of profits and growth in a particular financial year.

Recommended Articles

This is a guide to Shareholder Types. Here we also discuss the introduction and types of the shareholder which include equity and preference shareholders. You may also have a look at the following articles to learn more –

  1. Shareholders Agreement
  2. Shareholder vs Stakeholder
  3. Pass Through Entity
  4. Shareholder’s Equity
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