Chapter IV - Share Capital and Debentures
Section 43
Section 43: kinds of share capital
A company limited by shares can have two kinds of share capital: equity share capital, with voting rights or with differential rights under the prescribed rules, and preference share capital. Exemption notifications let private companies and Specified IFSC public companies disapply the section through their memorandum or articles.
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This article is for general information. Refer to the Companies Act, 2013 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
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 shareholders 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.
Introduction
Section 43 classifies the share capital of a company limited by shares. Equity share capital is defined by exclusion: it is all share capital that is not preference share capital.
Preference share capital is the part of issued share capital that carries, or would carry, a preferential right to dividend (a fixed amount or an amount at a fixed rate) and to repayment of paid-up capital on a winding up or repayment of capital. Extra participation rights do not stop such capital from being preference capital.
Key takeaways
Two kinds only
Share capital of a company limited by shares is either equity share capital or preference share capital.
Differential rights follow the rules
Equity with differential rights as to dividend, voting or otherwise must be issued in accordance with the rules prescribed under clause (a)(ii).
Participation does not change the class
Under Explanation (iii), capital remains preference capital even if it also participates in surplus dividends or surplus assets.
Exemptions
Section 43 does not apply to a private company, or a Specified IFSC public company, whose memorandum or articles so provide. The private-company exemption requires no default in filing financial statements or annual returns.
Classify each class against the Explanation
Read the terms of issue of each class. If the class carries, or would carry, a preferential right to dividend as a fixed amount or at a fixed rate and a preferential right to repayment of paid-up capital on a winding up or repayment of capital, it is preference share capital. All other share capital is equity share capital.
The dividend preference can be free of or subject to income-tax. The repayment preference can exist whether or not a fixed premium, or premium on a fixed scale, specified in the memorandum or articles is also payable.
Equity shares with differential rights
Clause (a)(ii) allows equity share capital with differential rights as to dividend, voting or otherwise only “in accordance with such rules as may be prescribed”. The conditions for such shares are therefore set by the rules made under the Act, not by section 43 itself. Check the current rule text on the Ministry of Corporate Affairs website before planning an issue.
Participating preference capital
Explanation (iii) keeps capital in the preference category even where, beyond its preferential amounts, it may share in further dividends with non-preference capital, or share in any surplus after the entire capital has been repaid on a winding up. Such participation can be full or limited.
Rights of earlier preference shareholders
The proviso states that nothing in the Act affects the rights of preference shareholders who were entitled to participate in the proceeds of winding up before the commencement of the Act.
Exemptions for private and IFSC companies
G.S.R. 464(E) dated 5 June 2015, issued under section 462, provides that sections 43 and 47 shall not apply to a private company where its memorandum or articles of association so provide. Paragraph 2A, inserted by G.S.R. 583(E) dated 13 June 2017, makes the exceptions in that notification applicable only to a private company that has not committed a default in filing its financial statements under section 137 or its annual return under section 92 with the Registrar.
G.S.R. 08(E) dated 4 January 2017 provides that sections 43 and 47 shall not apply to a Specified IFSC public company where its memorandum or articles of association provide for it. Check the current text of these notifications, including any later amendments, before relying on an exemption.
Practical preparation
Check whether the company relies on a section 462 exemption and whether its memorandum or articles provide for it; list every class in the memorandum, articles and terms of issue; test each class against both preferential rights in the Explanation; mark any differential-rights equity and check it against the current rules; keep the classification with the register of members and capital records.
Commencement and amendment record
Section 43 came into force on 1 April 2014 under S.O. 902(E) dated 26 March 2014. India Code’s consolidated text shows no amendment to this section, and the Companies (Amendment) Acts of 2015, 2017, 2019 and 2020 contain no amending instruction for it.
Practical checklist
Do
- Classify each class from its actual terms of issue.
- Check the current prescribed rules before issuing equity with differential rights.
Avoid
- Do not create a third kind of share capital unless an applicable exemption and the memorandum or articles allow it.
- Do not treat participation rights alone as converting preference capital into equity.
Illustrative example
Hypothetical: classifying a new class
A company proposes shares carrying a fixed-rate dividend preference, priority on repayment of capital, and a share in surplus profits.
Test dividend
The fixed-rate dividend preference meets clause (ii)(a) of the Explanation.
Test repayment
Priority on repayment of paid-up capital meets clause (ii)(b).
Check participation
Explanation (iii)(a) keeps the class as preference capital despite the surplus-profit share.
Outcome
- The class is preference share capital, and its voting position then follows section 47(2).
Glossary
- Equity share capital
- All share capital of a company limited by shares that is not preference share capital.
- Preference share capital
- Issued share capital carrying, or that would carry, a preferential right to fixed dividend and to repayment of paid-up capital, as described in the Explanation.
Frequently asked questions
Can a company limited by shares issue a third kind of share capital?
Section 43 says its share capital shall be of two kinds: equity share capital and preference share capital. Exemption notifications disapply section 43 for a private company, or a Specified IFSC public company, whose memorandum or articles so provide; the private-company exemption is subject to the filing condition in paragraph 2A.
Do participating preference shares count as equity?
No. Explanation (iii) deems capital to be preference capital even if it also participates in further dividends or in surplus assets.
Where are the conditions for differential-rights equity shares?
In the rules prescribed under clause (a)(ii) of section 43. Check the current rule text before relying on it.
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Contact BizeneedLast updated 11 October 2026