Think of a company as a pizza — when it raises money from the public, it slices that pizza into shares. Section 43 tells you there are only two legally recognized flavours of share capital for a company limited by shares: Equity Share Capital and Preference Share Capital. Everything else is just a variation of these two.
Equity Share Capital is the 'owner's slice.' Equity shareholders are the real risk-takers — they get paid dividends last and get their money back last if the company winds up. In return, they get voting rights (one share = one vote, normally). The Act also allows a special sub-type: Equity shares with Differential Voting Rights (DVRs) — think of Tata Motors DVR shares, where some shareholders get extra dividend but fewer votes, or vice versa. The rules for DVRs are prescribed separately. Equity capital = all share capital that is NOT preference share capital (the Act literally defines it by exclusion).
Preference Share Capital gets two preferential rights that equity doesn't automatically get: (1) a fixed or fixed-rate dividend paid before equity holders receive anything, and (2) priority repayment of capital in a winding-up situation. So if Rajesh & Co. Pvt. Ltd. goes bust, preference shareholders get their ₹100 per share back before equity holders see a rupee. Importantly, preference capital remains preference capital even if it also carries participating rights — meaning it can share in surplus dividends or surplus assets beyond the fixed preference. This is a classic exam trick: students think participating preference shares become equity. They don't. The proviso also protects holders of pre-2013 preference shares who had winding-up participation rights — their rights are preserved.
For exams, nail these three things: the two types, the two preferential rights of preference capital, and the DVR sub-type under equity. This section is frequently tested as a 4-mark theory question asking you to distinguish equity from preference share capital with definitions.
Example 1 — Identifying share type at winding up
Rajesh & Co. Pvt. Ltd. has the following capital structure at the time of winding up:
- 10,000 Equity shares of ₹10 each (fully paid) = ₹1,00,000
- 5,000 9% Preference shares of ₹100 each (fully paid) = ₹5,00,000
- Surplus assets available for distribution = ₹6,50,000
Working:
Step 1 — Repay Preference Share Capital first (preferential right):
5,000 × ₹100 = ₹5,00,000 paid to preference holders
Step 2 — Remaining assets for equity holders:
₹6,50,000 − ₹5,00,000 = ₹1,50,000
Step 3 — Per equity share:
₹1,50,000 ÷ 10,000 shares = ₹15 per equity share (vs. ₹10 paid-up — equity holders benefit from surplus)
Final Answer: Preference holders recover full ₹5,00,000; equity holders receive ₹15 per share.
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Example 2 — Participating Preference Shares (still preference capital?)
Ms. Iyer holds 1,000 Participating Preference shares of Sharma Tech Ltd. of ₹100 each. These carry: (a) fixed 8% preferential dividend, and (b) right to participate in remaining profits equally with equity holders.
Question: Are these equity shares or preference shares under Section 43?
Working:
Check the two preferential rights:
- Fixed dividend at 8% → ✅ Preferential right on dividend exists
- Priority repayment on winding up → ✅ Assume yes per terms
The participating right is additional — it doesn't cancel the preferential rights.
Section 43, Explanation (iii) explicitly states: capital is deemed to be preference capital even if it carries participating rights in dividends or surplus assets.
Final Answer: These are Preference Shares under Section 43, not Equity Shares.
📖 Bare Act text — Section 43, Companies Act 2013
(click to expand)
The share capital of a company limited by shares shall be of two kinds, namely:— (a) equity share capital— (i) with voting rights; or (ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and (b) preference share capital: Provided that nothing contained in this Act shall affect the rights of the preference share holders who are entitled to participate in the proceeds of winding up before the commencement of this Act. Explanation.—For the purposes of this section,— (i) "equity share capital", with reference to any company limited by shares, means all share capital which is not preference share capital; (ii) "preference share capital", with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to— (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and (b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company; (iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:— (a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; (b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.