1

Shares represent a unit of ownership in a company and dividend.

form the foundation for investment in the corporate world.
Shareholders are individuals or entities that hold these
shares and thereby become partial owners of the company. 3. Rights of Shareholders
Below, we delve into the meaning, nature, types of shares, Shareholders enjoy several rights that safeguard their
the rights of shareholders, and the process of application interests and allow them to participate in the company’s
and allotment of shares: growth and decision-making processes:
a. Basic Rights of Equity Shareholders
1. Meaning and Nature of Shares Voting Rights: Equity shareholders have the right to vote
Definition: A share is a unit of ownership in a company on important company matters, such as the election of the
that represents a proportionate claim on the company’s board of directors and major corporate policies.
profits and assets. Owning shares makes one a Right to Dividends: Shareholders are entitled to a share
shareholder, giving them rights and responsibilities as co- of the company's profits in the form of dividends, subject
owners of the company. to the company’s decision.
Nature of Shares: Right to Information: Shareholders have the right to
Transferable: Shares are transferable, allowing receive important information about the company’s
shareholders to sell or transfer their shares to others. financial performance and operations.
Indivisible: Shares are indivisible, meaning partial
Right to Transfer Ownership: Shareholders can
ownership of a single share is not permitted; it must be
transfer their shares to others without restriction.
held wholly.
Right to Attend Meetings: Shareholders can attend
Distinctive Number: Each share typically has a
general meetings and participate in discussions.
unique number that distinguishes it from other
Right to Claim Assets: In the event of liquidation,
shares.
shareholders can claim their share of the remaining assets
Rights-Based: Shares come with a bundle of rights, such
after all liabilities and preference shareholders have been
as voting rights, the right to dividends, and the right to
settled.
participate in surplus assets upon liquidation.

2. Types of Shares b. Rights of Preference Shareholders

Shares can be broadly categorized into two main types: equity Preferential Dividend: Right to receive
shares and preference shares. dividends before equity shareholders.
Right to Repayment of Capital: In case of liquidation,
a. Equity Shares (Ordinary Shares) preference shareholders have priority over equity
Meaning: Equity shares represent the basic unit of shareholders for repayment of their capital.
ownership in a company. Holders of equity shares are Conditional Voting Rights: Preference shareholders may
entitled to vote in company meetings and have the right to have voting rights in special circumstances, such as when
dividends, which vary based on the company's dividends have not been paid for a certain period.
profitability.
Characteristics:
Voting Rights: Equity shareholders typically
4. Application and Allotment of Shares
have voting rights that influence company The process of applying for and allotting shares involves
decisions. several steps to ensure transparency and fairness.
Dividend Variability: Dividends are paid at the discretion of
the company, depending on profits.
a. Application Process
Higher Risk and Reward: Equity shares carry 1. Public Issue Announcement: The company
higher risks but also the potential for higher returns. announces the public issue of shares through a prospectus,
which provides all the necessary details about the issue,
Types of Equity Shares: including the price, terms, and application process.
With Voting Rights: Regular equity shares.
Without Voting Rights: Shares that do not carry voting 2. Submission of Application: Investors submit
rights, often issued to encourage broader participation. applications for shares along with the requisite payment. This
b. Preference Shares can be done through physical forms or online platforms.
Meaning: Preference shares are those that give shareholders
a preferential right over equity shareholders to receive
3. Minimum Subscription: For the issue to be successful,
dividends and repayment of capital in case of liquidation. a minimum subscription limit must be met. If not, the issue is
Characteristics: considered unsuccessful, and the money is refunded.
Fixed Dividend: Holders receive a fixed
dividend rate before any dividends are paid
b. Allotment Process
to equity shareholders.
No Voting Rights: Generally, preference shareholders do
1. Allocation Decision: Once applications are
received, the company decides on the allocation of
not have voting rights except in specific situations. shares. This can be done on a proportional basis or
Priority in Repayment: Preference shareholders have through a lottery if the issue is oversubscribed.
a higher claim on company assets during liquidation
than equity shareholders. 2. Allotment Letter: Successful applicants receive an
allotment letter confirming their share allocation. Those
Types of Preference Shares: who do not receive an allotment are refunded their
Cumulative: Unpaid dividends accumulate and are application money.
paid in subsequent years before dividends are paid to
equity shareholders.
3. Share Certificate: After the shares are allotted, the
Non-Cumulative: No accumulation of unpaid dividends; company issues share certificates to the shareholders as proof
shareholders are entitled only to the dividends for the of ownership. In modern markets, shares are often issued in
current year. dematerialized (demat) form, eliminating the need for
Convertible: Can be converted into equity shares after a physical certificates.
specified period. 4. Listing on Stock Exchange: If it is an IPO, the
Non-Convertible: Cannot be converted into equity shares. newly issued shares are listed on a stock exchange for
Participating: Shareholders may receive additional trading in the secondary market.
dividends beyond the fixed rate if the company performs
well. Conclusion
Non-Participating: Shareholders are only entitled to the fixed Shares are fundamental to a company’s capital structure and
 2

provide an opportunity for investors to become part-owners of a 2018.

business. The nature and types of shares determine the rights Limits: Companies can only buy back shares up to 25% of
and obligations of shareholders, which vary between equity and their total paid- up capital and free reserves in a single
preference shareholders. The process of application and financial year.
allotment ensures that shares are distributed transparently and
equitably, allowing investors to participate in the company's 3. Issue of Bonus Shares
growth while protecting their interests. Proper regulatory Definition: Bonus shares are additional shares given to
frameworks govern these processes, ensuring that both the existing shareholders without any additional cost, based
issuing company and investors operate within a well-defined on the number of shares that the shareholders already
structure. own.
Sweat equity shares, buyback of shares, and the issue of
bonus shares are different financial mechanisms that companies Key Features of Bonus Shares:
use to manage their equity structure, reward employees, or No Cash Outflow: Bonus shares are issued by capitalizing
return value to shareholders. Here is an in- depth explanation of the company’s reserves, so there is no cash outflow.
each: Proportional Allocation: Bonus shares are issued in a certain
ratio (e.g., 1:1, 2:1), meaning a shareholder receives a set
number of additional shares for every share held.
1. Sweat Equity Shares Increase in Share Capital: The issuance of bonus shares
Definition: Sweat equity shares are shares issued by a increases the total number of outstanding shares, but it does
company to its directors or employees as a reward for their not affect the overall market capitalization of the company.
contributions to the company, typically in the form of know- Sign of Confidence: Issuing bonus shares is often seen
how, intellectual property rights, or other value-added work. as a sign of confidence by the company, indicating that
it is financially healthy and expects future profitability.
Key Features of Sweat Equity Shares: Impact on Shareholders:
Issued at Discount: Sweat equity shares are often issued Dilution of Share Price: While the total number of shares
at a discount or for consideration other than cash. increases, the share price typically decreases
Reward Mechanism: They serve as a way to reward proportionally so that the overall value of the
employees and directors who have made significant shareholder’s investment remains the same.
non-monetary contributions to the company.
Recognition of Value: These shares recognize the value Enhanced Liquidity: More shares in the market increase
of services provided or intellectual property brought in by liquidity, making it easier for shareholders to buy and sell
employees and directors. shares.
Dilution of Ownership: Issuing sweat equity shares can Regulatory Framework:
dilute the existing shareholders' stake as the total number of The issue of bonus shares in India is governed by the
shares increases. Companies Act, 2013 and SEBI regulations.
Regulatory Framework: In India, the issuance of sweat equity Conditions for Issue: Companies must ensure that the
shares is governed by the Companies Act, 2013 and SEBI decision to issue bonus shares is approved by the
(Share Based Employee Benefits and Sweat Equity) board and, in some cases, by the shareholders in a
Regulations, 2021. general meeting.
Comparison of Sweat Equity Shares, Buyback of
Limitations: Companies must follow certain rules, such Shares, and Bonus Shares
as the maximum percentage of shares that can be issued as
sweat equity and the minimum holding period before Conclusion
employees can sell the shares. Sweat equity shares, buyback of shares, and the issue of bonus
shares are strategic financial actions that companies use for
different purposes. Sweat equity shares help reward and retain
key employees, buybacks allow companies to reduce their share
2. Buyback of Shares capital and potentially boost shareholder value, and bonus shares
reward shareholders and increase the number of shares without a
Definition: A buyback (or repurchase) of shares is when a cash outflow. Each action is governed by specific regulations to
company buys back its own shares from the shareholders, ensure fairness and transparency in the market.
either through an open market or a tender offer.

Key Features of Buyback of Shares:

Reduction of Share Capital: When a company
repurchases its shares, the total number of outstanding
shares decreases, which can lead to an increase in the
earnings per share (EPS) and the market value of the
remaining shares.
Utilization of Surplus Funds: Companies often use
surplus cash to buy back shares as an alternative to
paying dividends.
Shareholder Value: It can be used as a tool to return value to
shareholders, especially when the company believes its shares
are undervalued.
Control of Ownership: Buybacks can be used to prevent a
hostile takeover by reducing the number of shares available
in the open market.

Methods of Buyback:
1. Open Market Purchase: The company buys
shares directly from the open market.
2. Tender Offer: The company makes an offer to buy a
specific number of shares at a fixed price, usually higher
than the market price.
3. Book Building: A method where the price is
determined based on bids received from shareholders.
Regulatory Framework:
In India, buybacks are regulated by the Companies Act,
2013 and SEBI (Buyback of Securities) Regulations,