Equity Shares, Preference Shares and Special Issues of Shares (ISC Class 12 Commerce)
Updated 18 October 2026 · Fact-checked
Equity shares give ownership, voting rights and a variable dividend after all other claims. Preference shares carry a fixed dividend and prior repayment of capital, usually without voting rights, and may be cumulative, participating, redeemable or convertible. Bonus shares are free, rights shares are offered first to existing holders for payment, and ESOP, sweat equity and QIP are other ways a company issues shares.
Preference shares get a fixed dividend and capital back first, while equity holders own the company, vote, and are paid last.
Illustration drawn for QuestionBuddy.
Understand Equity Shares, Preference Shares and Special Issues of Shares
1. Equity shares. They represent ownership; holders are the real owners and bear the ultimate risk.
*Features*: permanent capital; variable dividend after the preference dividend; voting rights; residual claim on income and assets; limited liability; free transferability in listed companies; pre-emptive right to new shares.
*Advantages to the company*: permanent capital; no fixed burden of dividend; no charge on assets; increases creditworthiness; suitable for risky ventures.
*Disadvantages*: dilution of control on new issues; higher cost (dividend is not tax-deductible, floatation cost is high); risk of over-capitalisation; unattractive to those wanting steady income; speculation.
2. Preference shares. They carry preferential rights over equity in (i) payment of dividend at a fixed rate and (ii) repayment of capital on winding up. They normally have no voting rights except on matters affecting them.
*Types*: cumulative (unpaid dividend accumulates) or non-cumulative; participating (also share in surplus profits after the equity dividend) or non-participating; redeemable (repaid after a fixed period; under the Companies Act, 2013, as stated in the chapter, preference shares must be redeemable within 20 years, with longer periods for some infrastructure projects, so irredeemable ones cannot be issued); convertible into equity or non-convertible.
*Advantages*: fixed dividend appeals to cautious investors; no dilution of control; no charge on assets; allows trading on equity. *Disadvantages*: fixed dividend is a burden in poor years, especially if cumulative; costlier than debt because the dividend is not tax-deductible.
3. Equity versus preference
| Basis | Equity | Preference |
|---|---|---|
| Dividend | Variable, after preference | Fixed rate, before equity |
| Capital repayment | Last | Before equity |
| Voting rights | Full | Limited |
| Risk | Highest | Lower |
| Suitable for | Risk-taking investors | Cautious investors |
4. Other issues (meaning only)
- Bonus shares: free shares to existing equity holders by capitalising reserves or profits, in proportion to holdings; no fresh funds come in.
- Rights issue: new shares offered first to existing shareholders in proportion to holdings at a price, often below market; the right can be accepted, renounced or sold; fresh funds come in.
- ESOP: an option for employees and directors to buy shares at a future date at a pre-determined, usually lower, price.
- Sweat equity shares: shares issued to employees or directors at a discount or for consideration other than cash, for know-how, intellectual property or value additions.
- QIP (Qualified Institutional Placement): issue of shares or convertible securities by a listed company to qualified institutional buyers without a public issue, under SEBI rules.
5. Bonus versus rights
| Basis | Bonus | Rights |
|---|---|---|
| Price | Free | Paid for |
| Funds | None new | Fresh funds |
| Source | Capitalisation of reserves | New issue to existing holders |
| Renunciation | Not possible | Possible |
Equity Shares, Preference Shares and Special Issues of Shares: key facts
- Equity versus preference
- Equity: variable dividend
- Votes
- Last repaid
- Preference: fixed dividend
- Limited votes
- Repaid first
- Table of five bases.
- Types of preference shares
- Cumulative
- Participating
- Redeemable
- Convertible
- Each has a non- opposite.
- Other issues
- Bonus
- Rights
- ESOP
- Sweat equity
- QIP
- Meaning only.
How to answer Equity Shares, Preference Shares and Special Issues of Shares questions
Questions ask for features, types, advantages, distinctions or a computation of dividends or bonus and rights entitlements.
- 1For dividends, pay preference dividend first at its fixed rate on its capital, then equity dividend, then any surplus to participating holders.
- 2For bonus and rights ratios, multiply holdings by the ratio.
- 3Identify the type from keywords: accumulates (cumulative), shares surplus (participating).
- 4For distinctions, write at least four bases in a table.
Equity Shares, Preference Shares and Special Issues of Shares in real life
The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Cumulative preference
Suppose a company with cumulative 8% preference shares of Rs 5,00,000 earns no profit in year 1 and pays nothing.
What is owed to preference holders in year 2 before equity gets anything?
Try it first, then show the solutionSolution
- Annual dividend = 8% of 5,00,000 = Rs 40,000.
- Cumulative: Rs 40,000 of year 1 is carried forward, so year 2 requires 40,000 + 40,000.
Answer: Rs 80,000 before any equity dividend.
Memory hook: Cumulative: dues accumulate.
Rights issue
Imagine a shareholder holds 500 shares of a company that offers a 1-for-5 rights issue at Rs 60 while the market price is Rs 90.
How many shares may she apply for, what will they cost, and what is her gain over the market price?
Try it first, then show the solutionSolution
- Entitlement = 500 / 5 = 100 shares.
- Cost = 100 x 60 = Rs 6,000; market value = 100 x 90 = Rs 9,000; gain = Rs 3,000.
Answer: 100 shares for Rs 6,000; gain Rs 3,000 over market price.
Memory hook: Rights go first to the owners.
Tricks to remember Equity Shares, Preference Shares and Special Issues of Shares
Short memory aids. Say each one aloud once, then use it on a question the same day.
Preference means first in line
Preference holders get dividend first and capital first; that is why they get fewer votes and lower risk.
Use it when: Equity versus preference.
Bonus = Free, Rights = Pay
Bonus costs nothing and brings in nothing; rights cost money and bring in funds.
Use it when: Bonus versus rights.
Equity Shares, Preference Shares and Special Issues of Shares: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Identify the preference share · 1 mark · MCQBoard level
Preference shares whose unpaid dividends of earlier years are carried forward and paid later are called:
(a) participating
(b) cumulative
(c) convertible
(d) redeemable
Try it first, then show the solutionSolution
- Dividends that accumulate when unpaid are cumulative.
Answer: (b)
Example 2: Bonus and rights meaning · 2 marks · Short answerBoard level
Company P gives each shareholder one extra share for every four held, without charging anything, while Company Q invites its shareholders to buy one new share for every four held at a stated price. Name each issue and say which one raises cash.
Try it first, then show the solutionSolution
- Company P makes a bonus issue: free shares by capitalising reserves.
- Company Q makes a rights issue: shares offered to existing holders for payment, so only Q raises cash.
Answer: P: bonus issue, no cash; Q: rights issue, fresh cash.
Example 3: Dividend distribution · 4 marks · Short answerHarder board level
A company has Rs 1,10,000 available for dividend. It has 8% participating preference shares of Rs 3,00,000 and equity shares of Rs 6,00,000 on which a 10% dividend is paid. After these, the surplus is shared with the preference holders. Calculate each dividend and the surplus.
Try it first, then show the solutionSolution
- Preference dividend = 8% of 3,00,000 = Rs 24,000.
- Equity dividend = 10% of 6,00,000 = Rs 60,000.
- Surplus = 1,10,000 - 24,000 - 60,000 = Rs 26,000.
- Participating preference holders also share this surplus.
Answer: Preference Rs 24,000, equity Rs 60,000, surplus Rs 26,000.
Example 4: Bonus entitlement · 4 marks · Short answerHarder board level
A shareholder holds 600 equity shares of Rs 10 each. The company announces a 1:4 bonus issue and later a 1-for-6 rights issue at Rs 15 (market price Rs 24). Calculate the bonus shares, the rights entitlement on the original holding, and the money needed to take up the rights.
Try it first, then show the solutionSolution
- Bonus shares = 600 x 1/4 = 150, free of cost.
- Rights entitlement on the original 600 shares = 600 / 6 = 100 shares.
- Money needed = 100 x 15 = Rs 1,500.
- Value gain over the market = 100 x (24 - 15) = Rs 900.
Answer: 150 bonus shares; 100 rights shares costing Rs 1,500.
Example 5: Choose the instrument · 8 marks · Long answerHOTS / competency
Suppose a company wants to raise funds for a new plant but its owners do not wish to lose control, and its investors include many cautious pensioners. Evaluate preference shares against equity shares for this need, with three points for each and a recommendation.
Try it first, then show the solutionSolution
- Preference: fixed dividend attracts cautious investors; no dilution of control because votes are limited; no charge on assets; also allows trading on equity.
- Preference drawbacks: fixed dividend burden, especially if cumulative; costlier than debt as dividend is not tax-deductible.
- Equity: permanent capital and no fixed burden; but dilutes control through new voting shares; higher cost and floatation cost.
- Recommendation: preference shares (redeemable, within the legal limit) fit the owners' wish to keep control and the investors' wish for steady income.
- The company should ensure that profits are enough to pay the fixed dividend.
Answer: Preference shares, with reasons and the fixed-dividend caution.
Where students lose marks in Equity Shares, Preference Shares and Special Issues of Shares
The slips examiners see most often, and what to write instead.
Mistake: Saying preference shareholders are creditors
They are owners with preferential rights; debenture holders are creditors.
Wrong working
Preference shareholders are creditors of the company.
Right working
Preference shareholders are owners with a fixed dividend and prior claim; debenture holders are creditors.
Do this: Owners get dividend; creditors get interest.
Usually costs: 1 mark.
Mistake: Forgetting arrears on cumulative preference shares
Unpaid dividends accumulate.
Wrong working
Payable this year = Rs 40,000 only.
Right working
Payable = arrears 40,000 + current 40,000 = Rs 80,000.
Do this: Add arrears first.
Usually costs: 2 marks.
Mistake: Saying a bonus issue raises funds
Reserves are capitalised; no cash comes in.
Wrong working
A bonus issue is a way of raising fresh capital.
Right working
A bonus issue brings no fresh funds; a rights issue does.
Do this: Bonus: no cash.
Usually costs: 1-2 marks.
Exam tips
- The syllabus gives bonus, rights, ESOP, sweat equity and QIP as meaning only; one clear sentence each is enough.
- Keep the Companies Act, 2013 point on preference shares as the chapter states it.
- Show the dividend in the order preference, equity, surplus.
- Always state the ratio in bonus and rights calculations.
Practice questions on Equity Shares, Preference Shares and Special Issues of Shares
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 1 mark · Very short answerBoard level
Expand ESOP.
Hint
Employees.
Answer
Employee Stock Option Plan.
Q2 · 2 marks · Short answerBoard level
Why does raising money by equity shares leave a company's assets free for later borrowing, and how does it help in a poor year?
Hint
No charge, no fixed payment.
Answer
Equity shares create no charge on the company's assets, so the assets can still back loans. In a poor year no fixed dividend must be paid, so there is no fixed burden.
Q3 · 2 marks · Short answerHarder board level
What are sweat equity shares and to whom are they issued?
Hint
Know-how.
Answer
Shares issued at a discount or for consideration other than cash to employees or directors for providing know-how, intellectual property rights or value additions.
Q4 · 4 marks · Short answerHarder board level
A company has 10% cumulative preference shares of Rs 4,00,000. It paid no dividend last year and has Rs 2,00,000 available this year. Calculate the amount payable to preference holders and the balance for equity.
Hint
Include arrears.
Answer
Annual dividend = 10% of 4,00,000 = Rs 40,000. Arrears of last year Rs 40,000 plus this year Rs 40,000 = Rs 80,000. Balance for equity = 2,00,000 - 80,000 = Rs 1,20,000.
Q5 · 4 marks · Short answerHOTS / competency
Suppose a shareholder says, 'A bonus issue makes me richer because I get free shares.' Evaluate in a few lines, using the idea of capitalisation of reserves.
Hint
Number up, value per share down.
Answer
A bonus issue converts reserves into share capital and gives more shares in proportion to holdings, but no fresh funds enter the company. The total value of the company is unchanged, so the value per share tends to fall as the number of shares rises; the shareholder's proportionate ownership remains the same.
Test your recall
Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.
1.Who gets dividend first: equity or preference?Show answer
Preference.
2.What does cumulative mean?Show answer
Unpaid dividends accumulate and are paid later.
3.Do bonus shares bring in funds?Show answer
No.
4.What is QIP?Show answer
Issue of shares to qualified institutional buyers without a public issue.
Equity Shares, Preference Shares and Special Issues of Shares: frequently asked questions
Do preference shareholders have voting rights?
Normally not, except on matters affecting them.
Can a right be sold?
Yes, a right can be accepted, renounced or sold.
Why are equity shareholders called owners?
They have voting rights and the residual claim after all other claims.