What are the Types of Shares in a Private Limited Company in India?

A company’s shareholding structure defines ownership, rights, and financial relationships. Understanding the types of shares is crucial for anyone involved with a private limited company in India, whether you’re a founder, investor, or employee. 

Knowing the differences between various share types helps in making informed decisions about fundraising, rewarding stakeholders, and managing corporate governance. The management and issue of shares are governed by the Companies Act, 2013, ensuring a clear and compliant framework.

What is a Private Company Limited by Shares?

A private company limited by shares is a distinct legal entity where the liability of its shareholders is limited to the amount they have invested or the unpaid value of their shares. This means that if the company faces debts, the shareholders’ personal assets are protected, and they are not liable beyond their share capital.

A private company has the following key characteristics:

• Limited Liability: Shareholders are not personally responsible for the company’s debts. Their risk is confined to their investment in the shares they hold.
• Share-based Capital: The company’s capital is divided into shares, and these shares can only be offered to a select group of people, not the general public.
• Restriction on Share Transfer: The company’s articles of association restrict the right to transfer shares.
• Limited Number of Members: It can have a maximum of 200 members, excluding past and present employees who were members.

Example: 

Suppose a startup, ABC Pvt. Ltd., is incorporated with an authorized share capital of ₹10,00,000, divided into 1,00,000 equity shares of ₹10 each.

Step 1: Deciding Shareholding Pattern

The founders decide the ownership structure:

• Founder A: 60% ownership
• Founder B: 30% ownership
• Founder C: 10% ownership

Step 2: Allotment of Shares

Based on the ownership percentage, shares are allotted as follows:

• Founder A → 60,000 shares × ₹10 = ₹6,00,000
• Founder B → 30,000 shares × ₹10 = ₹3,00,000
• Founder C → 10,000 shares × ₹10 = ₹1,00,000

So, the shareholding is:

• Founder A: 60%
• Founder B: 30%
• Founder C: 10%

Step 3: Individual Benefit (if the company makes a profit)

Suppose the company declares a dividend of ₹5 per share:

• Founder A → 60,000 × ₹5 = ₹3,00,000
• Founder B → 30,000 × ₹5 = ₹1,50,000
• Founder C → 10,000 × ₹5 = ₹50,000

Thus, dividend distribution is strictly in proportion to shareholding.

What are the Different Types of Shares in a Company​?

In India, a private company limited by shares typically issues two categories of shares: 

1. Equity Shares

Equity shares represent the true ownership of a company. When you buy an equity share, you become a part-owner. The key features of equity shares are:

• Voting Rights: Equity shareholders have the right to vote on company matters, such as appointing directors and approving financial statements.
• Dividends: Dividends are not fixed and are paid out from profits after the company pays all other obligations, including dividends to preference shareholders.
• Risk & Reward: Equity shareholders bear the highest risk but also have the potential for the highest reward, as they share in the company’s profits and are the last to be paid in case of liquidation.

2. Preference Shares

Preference shares give their holders certain special or preferential rights over equity shareholders. These rights typically relate to dividends and capital repayment. Key features include:

• Fixed Dividends: Preference shareholders receive a fixed dividend, which is paid before any dividend is paid to equity shareholders.
• Preference in Repayment: In case the company is liquidated, preference shareholders have the right to be repaid their capital before equity shareholders.

There are several types of preference shares:

• Cumulative vs. Non-Cumulative: Cumulative preference shares entitle the holder to receive any unpaid dividends from previous years. Non-cumulative shares do not.
• Redeemable vs. Irredeemable: Companies can buy back redeemable preference shares at a future date, while they cannot buy back irredeemable ones. In India, Section 55 of the Companies Act, 2013, generally prohibits irredeemable shares, except for perpetual preference shares issued by banks.
• Participating vs. Non-Participating: Companies allow holders of participating preference shares to receive a share of the remaining profits after paying all other dividends. Non-participating shares do not.

3. Additional & Special Variants

Beyond the main two categories, private companies also use special types of shares for specific purposes:

a) Bonus Shares in Private Limited Companies

Companies issue bonus shares free of cost to existing equity shareholders in proportion to their holdings. They distribute these shares from the company’s accumulated profits, reserves, or share premium account. Section 63 of the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014, govern bonus shares.

Why companies issue bonus shares:

• To reward existing shareholders without a cash payout.
• To convert reserves into share capital.
• To increase liquidity by raising the number of outstanding shares.
• To reflect strong financial stability.

Bonus shares maintain ownership percentages but reduce the per-share value by spreading profits over a larger number of shares.

b) Differential Voting Rights (DVR) Shares

DVR shares are equity shares with different voting or dividend rights compared to ordinary equity shares. In India, Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014, regulates the issuance of DVR shares. This rule sets limits on the percentage of such shares and specifies conditions for their issuance.

Key features:

• May carry fewer voting rights but higher dividend entitlement.
• Allow companies to raise funds without giving up significant control.
• Useful for family-owned or promoter-led businesses.

c) Sweat Equity Shares

Companies issue sweat equity shares to directors, employees, or contributors at a discount or for non-cash consideration. Section 54 of the Companies Act, 2013, and Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014, regulate this process.

They are usually given in recognition of:

• Technical know-how
• Intellectual property rights
• Substantial value addition to the company

This helps companies reward individuals who contribute beyond monetary investment. 

d) Employee Stock Option Plans (ESOPs)

ESOPs give employees the right to purchase shares at a pre-determined price after a set vesting period. Section 62(1)(b) of the Companies Act, 2013, and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, regulate ESOPs.

Benefits:

• Attracts and retains skilled employees.
• Motivates employees by linking rewards to company performance.
• Provides a long-term wealth creation opportunity.

e) Rights Shares

Companies offer rights shares to existing shareholders at a discounted price before offering them to outsiders. Section 62(1) of the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014, govern this process.

Purpose of rights issues:

• To raise capital while giving preference to current shareholders.
• To maintain ownership proportion and avoid unwanted dilution.
• To support expansion or fund new projects.

f) Alphabet / Golden Shares

Companies may create special classes of equity shares, often called “Class A, B, C shares” or Golden Shares, with customized rights. Companies issue these rare shares, usually in government-owned or strategic enterprises, to maintain control or protect key interests.

Examples:

• Shares with higher voting rights but limited dividends.
• Shares veto powers on certain key decisions.
• Companies create special classes for investors or strategic partners.

Section 43 of the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014, regulate Alphabet/Golden Shares, allowing companies to assign special rights to different classes of shares.

Equity vs Preference Shares 

A private company limited by shares issues equity and preference shares to meet different needs. The choice between equity shares vs preference shares depends on the investor’s goals and the company’s needs. 

Here’s a quick comparison: 

Feature	Equity Shares	Preference Shares
Ownership	Represent ownership in the company.	Provide preferential rights, limited control.
Voting Rights	Full voting rights.	Generally, no voting rights.
Dividend	Variable, depends on profits.	Fixed and pre-determined.
Repayment Priority	Last in case of liquidation.	Priority over equity holders.
Risk & Reward	Higher risk, higher potential reward.	Lower risk, stable but limited return.
Suitability	Founders, promoters, long-term investors.	Investors seeking steady income, lower risk.

In short: 

• Equity Shares in a private company limited by shares are best for those seeking ownership, voting power, and higher growth potential.
• Preference Shares are suitable for those preferring fixed returns, safety, and priority during liquidation.

Regulatory Compliance for Issuing Shares in India

All share issuances in a private company limited by shares must comply with the Companies Act, 2013. Key steps include:

• Board Resolution: Approval from the Board of Directors is mandatory before issuing or allotting any shares.
• Shareholders’ Approval (if required): Certain types of shares, such as preference shares or increases in authorized capital, may require approval from existing shareholders through a special resolution.
• Filing with the ROC: The company must file the following forms with the Registrar of Companies (ROC):
  • Form PAS-3: For allotment of shares.
  • Form SH-7: For increasing authorized capital.
  • Form MGT-7 / AOC-4 (Annual filings): To reflect changes in shareholding in annual returns and financial statements.
• Compliance with SEBI or Other Regulations (if applicable): Private companies must follow SEBI or other investment regulations when they raise funds through private placements or from external investors, even if they are not listed.
• Adherence to Articles of Association (AOA): The issuance must follow the company’s rules on share classes, rights, and restrictions, and remain consistent with the AOA.
• Share Certificates: Issued within 2 months of allotment to shareholders as proof of ownership.

These steps ensure that the process is legal, transparent, and fair to all shareholders.

Practical Applications of Share Issuance

A private company limited by shares can issue shares for various purposes:

• Raising Capital: Through equity shares for expansion, new projects, or working capital.
• Attracting Investors: By offering preference shares with fixed dividends and repayment priority.
• Rewarding Shareholders: Through bonus shares issued from accumulated profits or reserves.
• Retaining and Motivating Employees: Using sweat equity or Employee Stock Option Plans (ESOPs).
• Strategic Partnerships: Issuing special classes of shares (DVRs, Alphabet/Golden Shares) to investors or partners while retaining control.
• Companies use shares in mergers, acquisitions, or restructuring to reallocate ownership without any cash outflow.

Following the Companies Act, 2013, and the Articles of Association (AOA) ensures fairness, transparency, and long-term stability for everyone involved. Service Providers like RegisterKaro can help companies manage the entire share issuance process smoothly and compliantly.

Frequently Asked Questions (FAQs)

Q: How many types of shares are there in India?

The main types of shares in India are:

1. Equity Shares – Ordinary ownership shares with voting rights and variable dividends.
2. Preference Shares – Fixed dividend shares with priority in repayment.
3. Special Variants – Includes:
   • Bonus shares
   • Sweat equity shares
   • Employee Stock Option Plans (ESOPs)
   • Differential Voting Rights (DVR) shares
   • Rights shares
   • Alphabet or Golden shares

Q: Why can’t we buy shares of a private limited company?

Shares of a private limited company do not trade on any stock exchange. The company issues and transfers shares only to existing shareholders, family members, employees, or approved investors. Unlike a public company, it does not allow public trading of its shares.

Q: How to become a shareholder of a private limited company?

You can become a shareholder by:

• Subscribing to shares at the time of company incorporation.
• Purchasing shares through a private allotment approved by the Board of Directors.
• Receiving shares as a transfer from an existing shareholder, following the company’s Articles of Association (AOA) and approval from the Board.

Q: Can a private company issue preference shares?

Yes, a private company can issue preference shares, provided its Articles of Association permit it and the issuance follows the regulations of the Companies Act, 2013.

Q: Can a private company issue shares to the public?

No, a private company cannot issue shares to the public. It can only issue shares through a private placement to a select group of individuals or entities.

Q: What is the difference between equity and preference shares?

The main difference is that equity shares carry voting rights and a variable dividend, while preference shares generally do not have voting rights but offer a fixed dividend and priority in repayment.

Q: How do private limited companies issue bonus shares?

The company issues bonus shares free of cost to existing equity shareholders, using its accumulated reserves.

Q: Can private companies issue DVR shares?

Yes. Private companies can issue DVR (Differential Voting Rights) shares, but they must follow Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014, which limits the percentage and voting rights of such shares.

Q: How does India tax ESOPs?

ESOPs are taxed in two stages:

• On Exercise: The Difference between market value and exercise price is taxed as salary.
  
• On Sale of Shares: Any gain is taxed as capital gains (short-term or long-term, depending on holding period).