This article has been writern by Aditya Jain.

WHAT IS EQUITY?

According to Cambridge Dictionary, equity means – the value of a company, divided into many equal parts owned by the shareholders, or one of the equal parts into which the value of a company is divided. Equity is defined to mean residual economic interest in the entity that is to say the net value of the assets of the entity after deducting all applicable debt. Equity has another name, that is, shareholders equity. For private companies, it is owners’ equity. Shareholders equity represents the book value of the company. If a company’s all assets were liquidated and all its debts were paid off, the value which returns to the company’s shareholders represents equity. Equity is calculated by subtracting total liabilities from company’s total assets. 

WHAT IS SHARE CAPITAL?

Share refers to the amount collected by the company from the people to contribute to its capital. It is collectively known as Share Capital and individually as Share. Shares are valued in terms of money. Section 2(84) of the 2013 Companies Act, states that, “share” means a share in the share capital of a company and includes stock”. The income received from shares is called a dividend and a person who owns shares is called as shareholder. Shares can be voting or non-voting, meaning they either do or do not carry the right to vote on board of directors and corporate policy. Whether this right exists often affect the value of share. 

Share Capital is of two types, Equity share capital and Preference share capital. Any share capital that is not preference share capital is equity share capital and equity capital has been further divided into two types equity shares with voting rights and equity shares with differential voting rights. 

EQUITY SHARES 

In financial terms it is sometimes referred to as “risk” capital, normally confer on their holders the residue of the rights of the company which have not been conferred on other classes. The equity shares usually carry the main financial risk if the company is unsuccessful, but they carry the greatest prospects of financial reward if the venture of the company is successful. Equity shares carry voting rights and therefore confer power on the equity shareholders to take decisions. The law also permits the issuance of equity shares with differential rights.

VOTING RIGHTS

Section 87 of 1956 Companies Act

It deals with voting rights of equity shareholders and preference shareholders – while a member holding equity shares has the right to vote on every resolution placed before the company, a member holding any preference share capital has the right to vote only on the resolutions placed before the company which directly affects the rights attached to his/her preference shares. However, as regards preference shareholders the section carved an exception – in the case the dividend due on such preference shares or any part thereof remained unpaid for the specified period, then preference shareholders would be entitled to vote on every resolution placed before the company at any meeting.

Section 47 of Companies Act 2013

This section corresponds to section 87 of the 1956 act and is concerned with voting rights of equity shareholders and preference shareholders. It confers voting rights on equity and preference shareholders and specifies the periphery of such rights in each case as discussed below.

Voting Rights of equity shareholders [ Section 47 (1) of Companies Act, 2013]

Equity shareholders have a right to vote at every resolution placed before the company. Section 47 (1)(b) of the 2013 act provides for the proportionate voting rights to each member – however, the membership of the company changes constantly due to transfers. To allow companies to freeze a list of members on a particular day, the common practice adopted by companies is to have a “record date”, and close the transfer books during a certain period before such record date. However, in case of dematerialized shares, transfers take place momentarily without any need for the company to register. In such cases, determination of membership and the quantity of shares held by the member may be difficult. 

Voting Rights vs. Voting Power 

Section 2(93) of the 2013 Act defines ‘voting rights’ to mean the right of a member of a company to vote in any meeting of the company or by means of postal ballot. Whereas section 2 (89) of the 2013 Act defines ‘total voting power’ in relation to a matter on a poll at a meeting of a number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes. Now, on a show of hands, each member has only one vote; while on a poll the voting rights of a member shall be in proportion to his/her share in the paid-up equity share capital of the company. The latter is voting power, that is voting power is calculated taking into account the paid-up value of shares held by the member; while voting right may be either on ‘one person – one vote’ basis or on the basis of paid-up value of shares.

Differential Voting Rights 

As stated earlier, voting right on a poll shall be determined on the basis of a member’s share in the paid-up equity capital of the company. However, the same shall be subject to the provisions of differential voting rights as is evident from the opening sentence of sub-section (1) of section 47 of the 2013 Act, “subject to the provisions of section 43…” therefore, the ‘one share one vote’ rule is subject to the provisions relating to differential voting rights contained in section 43 of the 2013 Act read with relevant rules. According, one share may carry less than one vote.

Use of multiple votes 

On a poll, a member need not use all his/her votes in the same manner; that is, he/she is free to use his/her votes in any proportion he wants. Manner of voting includes e-voting, and postal ballot.

EQUITY SHARES WITH VOTING RIGHTS

Section 85 of 1956 Act 

This section divides Share Capital into two Preference Share Capital and Equity Share Capital. While preference share capital has been defined, to mean the part of share capital that has preferential rights to dividend and repayment of capital, equity share capital was defined as share capital other than preference capital. Initially section 86 of 1956 act restricted a company ltd by shares such that the company can have only these two kinds of share capital- equity and preference. However, the companies (Amendment) 2000 further categorization of equity share capital became possible as equity shares can be issued with voting rights or with differential rights as to voting, dividend, or otherwise in accordance with the rules prescribed under Companies Act 1956. A new definition share with differential voting rights was added by Companies Act 2000as sub – section 46 (A) of section 2 of 1956 Act.

Section 43 of 2013 Act

Section 43 is a combination of ss. 2(46A), section 85 and section 86of 1956 Act. This section only applies to company ltd by shares and lays down the nature of different kinds of share capital that can be issued by a company limited by shares. Section 85 to 89 of the 1956 act did not apply to a private company which was not a subsidiary of a public company. However, the 2013 Act makes no such distinction. Therefore, ss 43 and 47 of the 2013 Act are applicable to private companies as well. 7 of the 2013 Act are applicable to private companies as well. 7 of the 2013 Act are applicable to private companies as well. In this respect, it is relevant to consider the power vested with the central government to direct, by way of notification that any of the provisions of the 2013 Act shall not apply to specified class or classes of companies. Thus, the central government by way of a notification under section 462 of the 2013 Act can modify, or make not applicable, to private company’s certain sections of the 2013 Act. However, at the time of going to press, no such notifications have been made. 

Such a possibility of exempting private companies has also been expressed in the Report of the Parliamentary Standing Committe on finance, wherein it has been stated, “section 90 pf existing Act was not considered even in the Companies Bill, 2009 since it was felt that exemptions to class of companies can be given through notifications after due deliberations with concerned with concerned stakeholders and through laying in a draft form in the parliament. Clause 462 provides for such powers/procedure. It is submitted that this approach is more conductive to deal with all possible eventualities. However, the provisions are not applicable to unlimited companies, and companies limited by guarantee. 

Reference

 1. Company Law, A. Ramaiya

2. Elements of Company Law, N.D. Kapoor

3. https://groww.in/p/equity-share-capital 

4. https://www.investopedia.com/terms/e/equity.asp 

5. https://www.indiafilings.com/learn/voting-rights-of-shareholders 

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