## Securities of a Company — Conceptual Overview
### The two broad limbs of a company's capital structure
A company funds itself through (a) share capital (ownership instruments) and (b) debentures (debt instruments). Each splits further.
### A. Share Capital
#### (i) Equity Share Capital
Defined residually — 'shares which are not preference shares.' Equity shareholders are the residual owners; they get whatever is left after preference shareholders are paid both in dividend and in winding-up.
Equity can be further classified into:
- Plain-vanilla equity — with normal voting rights, or
- Equity with differential rights as to dividend, voting, or otherwise (so-called DVR shares).
#### (ii) Preference Share Capital
Carries preferential rights over equity shares for:
- Payment of dividend, AND
- Repayment of capital in winding-up.
Types of preference shares (these are cumulative classifications — a single preference share can be, say, cumulative + participating + convertible + redeemable):
- Cumulative or Non-cumulative — whether unpaid dividends accumulate.
- Participating or Non-participating — whether they share in surplus profits beyond their fixed dividend.
- Convertible or Non-convertible — whether they convert into equity.
- Redeemable or Irredeemable — whether they are repayable.
### B. Debentures
Debt instruments — 'lenders' interest with limited risks and returns.' Holders are creditors, not owners; they have a fixed claim and no voting right.
Types of debentures:
- Secured or unsecured — whether backed by a charge on assets.
- Convertible or non-convertible — whether convertible into equity.
- Redeemable or irredeemable — whether repayable on a fixed date.
### Important nuances on preference shares
#### Cumulative vs Non-cumulative
- Cumulative preference shares: If profits in a year are insufficient, the dividend accumulates as arrears and is payable from profits of later years. Until cumulative preference dividend (current + arrears) is paid, no dividend can be paid on equity shares.
- Non-cumulative preference shares: Dividend is payable only in a year of profit. If not declared, the right to receive dividend for that year lapses — no accumulation.
#### Can a company have ONLY preference share capital?
No. A company may have only equity share capital, but it cannot exist on preference capital alone. The logic: preference shareholders enjoy preferential rights — but a preference can exist only relative to something else. In the absence of equity, there is no class for the preference shares to be 'preferential' over. Hence equity must always be present.