Companies Act, 2013 - Share Capital and Debentures
Section 43 of Companies Act, 2013: Kinds of Share Capital
What does Section 43 provide?
Section 43 is contained in Chapter IV of the Companies Act, 2013, which deals with share capital and debentures. It classifies the share capital of a company limited by shares into equity share capital and preference share capital.
Statutory classification under Section 43
(a) Equity share capital may be:
- equity share capital with voting rights; or
- equity share capital with differential rights as to dividend, voting or otherwise, in accordance with the prescribed rules.
(b) Preference share capital is the other principal category recognised by Section 43.
Meaning of equity share capital
For a company limited by shares, equity share capital means the share capital that is not preference share capital. In practical terms, equity shareholders ordinarily participate in the residual ownership of the company, subject to the rights attached to the particular class of shares and the provisions of the Act, rules, memorandum and articles.
Equity shares with differential rights
Section 43 expressly permits equity shares carrying differential rights as to dividend, voting or otherwise. The issue of such shares must comply with the conditions prescribed under the Companies (Share Capital and Debentures) Rules, 2014, including the applicable requirements of Rule 4.
Meaning of preference share capital
Preference share capital refers to that part of the issued share capital which carries, or would carry, a preferential right with respect to the matters specified in Section 43.
| Preferential right | Meaning under Section 43 |
|---|---|
| Dividend | A preferential right to payment of dividend, either as a fixed amount or at a fixed rate, subject to the terms governing the shares. |
| Repayment of capital | A preferential right, on winding up or repayment of capital, to repayment of the amount of share capital paid-up or deemed to have been paid-up, with any applicable premium as specified in the memorandum or articles. |
Participating preference shares remain preference capital
Section 43 further clarifies that capital does not cease to be preference capital merely because it also carries a right to participate, fully or to a limited extent, in additional dividends or in surplus assets remaining after repayment of the entire capital. The statutory test remains the existence of the preferential rights described in the section.
Protection of certain pre-existing preference shareholder rights
The proviso to Section 43 preserves the rights of preference shareholders who, before commencement of the Companies Act, 2013, were entitled to participate in the proceeds of winding up. This transitional protection prevents Section 43 from taking away those existing rights.
Section 43 and the Companies (Share Capital and Debentures) Rules, 2014
Section 43 should be read with the Companies (Share Capital and Debentures) Rules, 2014 where the Act requires compliance with prescribed conditions. In particular, equity shares with differential rights are regulated by Rule 4 and its amendments. Companies should therefore verify the current rule position and any applicable MCA notification before an issue of differential-right equity shares.
Difference between equity and preference share capital
| Point | Equity share capital | Preference share capital |
|---|---|---|
| Core definition | Share capital that is not preference share capital. | Issued share capital carrying the statutory preferential rights described in Section 43. |
| Voting/dividend structure | May carry voting rights or permissible differential rights. | Rights are primarily identified by preference regarding dividend and repayment of capital. |
| Participation | Rights depend on the class and terms of issue. | May also carry participating rights without losing its character as preference capital where Section 43 applies. |
Official legal resources
For the authoritative text and current regulatory position, refer to the Companies Act, 2013 published by the Ministry of Corporate Affairs and the Ministry of Corporate Affairs portal for current rules, notifications and amendments.
Note: This page is a general explanation of Section 43. For a transaction or corporate action, the current Act, applicable rules, notifications, articles of association and other regulatory requirements should be checked.