Distinguish Between Equity Shares and Preference Shares | 12th HSC Secretarial Practice (S.P.) Chapter 2
The distinction between Equity Shares and Preference Shares is the most repeated and important question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question regularly appears in Question 4 (Distinguish Between) carrying 4 Marks. Below is the complete, point-wise tabular solution strictly aligned with the latest Balbharati Textbook and official board marking scheme.
Board Exam Marking Scheme Tip: To score a guaranteed 4 out of 4 Marks in Question 4, always write your answer in a 3-column table including the Basis of Distinction. While 4 valid points fetch 4 marks, always write 5 to 6 points (starting with Meaning, Rate of Dividend, and Voting Rights) as a safety buffer!
Distinguish Between: Equity Shares and Preference Shares
| Sr. No. | Basis of Distinction | Equity Shares | Preference Shares |
|---|---|---|---|
| 1. | Meaning | Shares that are not preference shares are called Equity Shares. Simply stated, these shares do not have a preferential right for payment of dividend and repayment of capital. | Preference Shares are shares that carry a preferential right as to the payment of dividend during the lifetime of the company and the return of capital on winding up of the company. |
| 2. | Rate of Dividend | Equity shares are given dividend at a fluctuating rate depending upon the profits of the company and the recommendation of the Board of Directors. | Preference shareholders get dividend at a fixed rate out of the net profits before any dividend is paid to equity shareholders. |
| 3. | Voting Rights | Equity shareholders enjoy normal voting rights on all matters. They participate in the management of their company by electing directors. | Preference shareholders do not enjoy normal voting rights. They can vote only on matters directly affecting their rights or when dividend remains unpaid for two or more years. |
| 4. | Return of Capital | Equity capital cannot be returned during the lifetime of the company (except in the case of a buy-back of shares). In winding up, they are paid last. | A company can issue redeemable preference shares, which can be repaid during the lifetime of the company. In winding up, they are repaid before equity capital. |
| 5. | Nature of Capital | Equity capital is known as "Risk Capital" or "Venture Capital" because it stays permanently with the company and bears the maximum financial risk. | Preference capital is considered "Safe Capital" with a stable and fixed return. It stays with the company for a pre-decided period (maximum 20 years). |
| 6. | Nature of Investors | Investors who are ready to take risks for higher returns and capital growth prefer equity shares. | Investors who are cautious about the safety of their investment and prefer a steady, fixed income opt for preference shares. |
| 7. | Face Value | The face value of equity shares is generally low — usually Rs. 1/- or Rs. 10/- per share. | The face value of preference shares is relatively higher — usually Rs. 100/- and so on. |
| 8. | Right and Bonus Issue | Equity shareholders are entitled to get Bonus Shares (free shares) and Rights Issue of shares. | Preference shareholders are not eligible for Bonus Shares or Rights Issue of shares. |
| 9. | Capital Appreciation | The market value of equity shares increases with the prosperity of the company, leading to high capital appreciation. | The market value of preference shares does not fluctuate widely, so there is no chance of capital appreciation. |
Quick Memory Trick to Remember All Points in the Exam
Memory Shortcut (Mnemonic — "MR-VR-NF-RBC"):
Remember these 6 easiest points from the Balbharati textbook to write in under 4 minutes:
1. Meaning (No Preferential Rights vs. Two Preferential Rights)
2. Rate of Dividend (Fluctuating Rate vs. Fixed Rate)
3. Voting Rights (Normal Voting Rights vs. Restricted Voting Rights)
4. Return of Capital (Not Repaid During Lifetime vs. Redeemable After Fixed Period)
5. Nature of Capital (Risk / Venture Capital vs. Safe Capital)
6. Face Value (Low: Rs. 1 or Rs. 10 vs. Higher: Rs. 100)
Key Concept Summary for Objective Questions (Q.1)
- Legal Provision: According to Section 43 of the Companies Act, 2013, a company limited by shares can issue two kinds of share capital: (a) Equity Share Capital and (b) Preference Share Capital.
- Residual Claimants: Equity Shareholders are known as the "Real Owners" and "Residual Claimants" of the company because they receive whatever profit or asset value is left after paying all other stakeholders.
- Irredeemable Preference Shares: Under Section 55 of the Companies Act, 2013, a company in India cannot issue irredeemable preference shares or preference shares redeemable after 20 years (except for infrastructure projects).