Satyam Corp Law.docx

DIFFERENT CLASSES OF SHAREHOLDERS

5.3 CORPORATE LAW I

Submitted by: Satyam Verma UG16-42

Submitted to: Ramesh Kumar (Professor of Law.)

MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR

TABLE OF CONTENTS INTRODUCTION .......................................................................................................................... 1 RESEARCH METHODOLOGY ................................................................................................ 1 RESEARCH AIMS AND OBJECTIVES ................................................................................... 1 RESEARCH SCOPE AND LIMITATIONS .............................................................................. 1 DIFFERENT TYPES OF SHAREHOLDERS ............................................................................... 2 1.Common/Equity Shareholders ................................................................................................. 2 2.Preferred Stockholders ......................................................................................................... 3 When the Company is in Distress ............................................................................................... 8 HOW SHARES ARE MADE PUBLIC FOR THE FIRST TIME ................................................. 9 1.

Initial Public Offering (IPO) ........................................................................................... 9

2.

Book Building Process .................................................................................................... 9

TRADING IN THE STOCK MARKET....................................................................................... 10 1.

Primary Market ............................................................................................................. 10

2.

Secondary Market ......................................................................................................... 10

TYPES OF SHARES .................................................................................................................... 11 1.

Ordinary shares ................................................................................................................. 12

2.

Deferred shares ................................................................................................................. 12

3.

Non-voting shares ............................................................................................................. 12

4.

Redeemable shares ............................................................................................................ 13

5.

Preference shares .............................................................................................................. 13

6.

Management shares ........................................................................................................... 13

7.

Alphabet shares ................................................................................................................. 14

Alphabet shares are a subclass of ordinary shares, which allow a company to vary the the rights attached to shareholders. ................................................................................................. 14 Why Do Companies Issue Shares & Why Do Investors Buy Them............................................. 15 preference Shares .......................................................................................................................... 17 ordinary Shares ............................................................................................................................. 17 THE SIGNIFICANCE OF SHARES............................................................................................ 18 1.

Capital Growth .............................................................................................................. 18

2.

Dividends ...................................................................................................................... 18

3.

Liquidity........................................................................................................................ 18

4.

Shareholder Benefits ..................................................................................................... 18

RISKS ASSOCIATED WITH INVESTMENT IN SHARES ...................................................... 19 1.

Volatility ....................................................................................................................... 19

2.

Credit Risk .................................................................................................................... 19

3.

Unexpected Events........................................................................................................ 19

CONCLUSION ............................................................................................................................. 20

INTRODUCTION Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. Physical paper stock certificates have been replaced with electronic recording of stock shares, just as mutual fund shares are recorded electronically.1When establishing a corporation, owners may choose to issue common stock or preferred stock. Most companies issue common stock. The stock may benefit shareholders through appreciation and dividends, making common stock riskier than preferred stock. Common stock also comes with voting rights, giving shareholders more control over the business. In addition, certain common stock comes with pre-emptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock. In contrast, preferred stock typically does not offer appreciation in value or voting rights in the corporation. However, the stock typically has set payment criteria; a dividend that is paid out regularly, making the stock less risky than common stock. Also, preferred stock may often be redeemed at a more beneficial price than common stock. Because preferred stock takes priority over common stock, if the business files for bankruptcy and pays its lenders, preferred shareholders receive payment before common shareholders.2 RESEARCH METHODOLOGY Doctrinal Method of research has been used. RESEARCH AIMS AND OBJECTIVES The aim of the paper is to discuss the various classes of shares. RESEARCH SCOPE AND LIMITATIONS The research is extended to but not limited by a comprehensive discussion on shares. 1

https://www.investopedia.com/terms/s/shares.asp#ixzz5QOpZZKa0

2

https://www.investopedia.com/terms/s/shares.asp#ixzz5QOpnsfvV

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DIFFERENT TYPES OF SHAREHOLDERS3

By the simplest definition, a shareholder is any person or institution that owns one or more shares of a company's stock. Not all shareholders are created equal, however. While some get to vote on key corporate decisions and receive dividends when the company is profitable, others are passive investors who receive a fixed return for their investment every year, rather like the guaranteed interest rate on a loan. There are two categories of shareholders who own either common or preferred shares. 1.Common/Equity Shareholders Many companies only have one type of share, known as common stock. As such, most shareholders are common or "ordinary" stockholders and when you read about share valuations, this is usually what is meant. Common shareholders have an ownership stake in the company. Common shareholders also have the right to file a class action lawsuit against the company if there is an act of wrongdoing that potentially harms the company or negatively affects the value of its common shares. This enables them to exercise considerable control over how the company is managed and how it handles strategies for growth. Merits of Equity Shares • Equity capital is the foundation of the capital of a company. It stands last in the list of claims and it provides a cushion for creditors. • Equity capital provides creditworthiness to the company and confidence to prospective loan providers. • Investors who are willing to take a bigger risk for higher returns prefer equity shares. • There is no burden on the company, as payment of dividend to the equity shareholders is not compulsory.

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C.R. DATTA, DATTA ON THE COMPANY LAW 29 (2008) pg 1.902

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• Equity issue raises funds without creating any charge on the assets of the company. • Voting rights of equity shareholders make them have democratic control over the management of the company Now let’s understand what limits the company from raising them:

Limitations of Equity Shares • Investors who prefer steady income may not prefer equity shares. • The cost of equity shares is higher than the cost of raising funds through other sources. • The issue of additional equity shares dilutes the voting power and earnings of existing equity shareholders. • Many formalities and procedural delays are involved and they are time-consuming processes

2.Preferred Stockholders Preferred stockholders own a different type of share known as preferred stock. These shareholders have no voting rights, which means they cannot influence management decisionmaking. What they do have, is a guaranteed right to be paid a fixed amount of dividend every year, and to receive this payment before the company pays a dividend to common shareholders. The amount of dividend is fixed or attaches to a specified interest rate; for example, a $10, 5percent preference share would pay an annual dividend of 50 cents. Both common stock and preferred stock can go up in value if the company is doing well. However, common stock is more volatile and tends to experience much larger capital gains – or losses – than preferred stock. The right to receive a fixed dividend means that preferred stock behaves more like debt than a common share. Investors who wish to generate a predictable investment income – rather than ride the volatility of the stock market – typically choose to own preferred shares.

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Benefits to Preference Shareholders4 • Repayment of capital, after payment of debt holders, if the company is wound up; • Higher level of income for preference shareholders than debt holders because of a higher risk involved, as preference shareholders are not always guaranteed a dividend payout; • Preference shareholders have a better guarantee for a dividend payout than ordinary shareholders because dividend payments are usually fixed; Preference shareholders are guaranteed a specified percentage dividends if the company makes a profit.

Types of Preference Shares5 There are different classes of preference shares. They are as follows: • Cumulative Preference Shares. • Non-cumulative Preference Shares. • Participating Preference Shares. • Non-participating Preference Shares. • Convertible Preference Shares. • Non-convertible Preference Shares. • Redeemable Preference Shares. • Guaranteed Preference Shares.

1. Cumulative preference shares Shares which have the right of dividend of a company even in those years in which it makes no profit are called cumulative preference share. The company must pay the unpaid dividends on preference shares before the payment of dividends to equity shareholders. If in any gear the company does not earn adequate profit, dividends on preference shares may not be paid for that year. In case of cumulative preference shares, such unpaid dividend is treated as

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https://www.jse.co.za/content/JSEEducationItems/PreferenceShares.pdf https://efinancemanagement.com/sources-of-finance/types-of-preference-shares 4

arrears. The arrears will accumulate and they will be payable out of the profits of the subsequent years. Dividend on other classes of shares can be paid only after the payment of such arrears. If the Articles are silent, all preference shares are assumed to be cumulative preference shares.

2. Non-Cumulative preference shares Non-cumulative preference shares are in contrast to Cumulative preference shares. Noncumulative dividends do not accumulate if they are not paid when due. The dividend on these shares are payable only out of the profits of the current year. If in any year the company does not earn adequate profit, the holders get no dividend or partial dividend. In that case, the unpaid dividend will not be carried forward to subsequent years. The holder cannot claim arrears of dividend.

3. Participating Preference Shares The holders of Participating preference share receive stipulated rate of dividend and also participate in the additional earnings of the company along with the equity shareholders. During the lifetime of the company in addition to the fixed dividend, the shareholders of this kind of shares have a right to participate in the surplus of profits, which remains after payment to the equity shareholders. At the time of winding up in addition to their shares, the shareholders have a right to participate in the surplus of assets, which remains after payment to the equity shareholders. The surplus will be distributed between the participating preference shareholders and equity shareholders in an agreed ratio.

4. Non-Participating Preference Shares In practice, most preference shares are non-participating in nature. It means that preference shareholders receive only stated dividend and no more. This is based on the fact that the preference shareholders surrender their claim to extra earnings in lieu of their right to receive the stated dividend. The holders of non-participating preference shares have no right either to participate in the surplus of profits, which remains after payment to equity shareholders (during the lifetime) or to participate in the surplus of assets, which remains after payment to equity shareholders (at the time of winding up).If the Articles are silent, all preference shares are treated as nonparticipating 5

preference shares. 5. Redeemable preference shares6 According to Sec. 80 of the Companies Act, the preference shares, which can be redeemed after a specified period or at the discretion of the company, are called redeemable preference shares. Non-redeemable preference share is permanent in nature and its shareholding is continuous till the company goes into liquidation. In this sense, the preference share resembles the equity share. So, in order to attract the investor, a clause is included in the agreement for redeeming the preference share after the expiry of a specified period. The redemption of preference share is advantageous for the company. It acts as a hedge against inflation. When the money rate declines, the company may redeem the shares and refinance it at a lower dividend rate.

6. Non-redeemable preference shares Redeemable preference shares are also called, at the option of the company. If this call is exercised by the company, the investor must find alternative form of investment for investing the sum he gets on the retirement of the shares. Investment in equity share is more profitable than that of preference share. Preference share holders do not participate, in the extra earnings of the company, except in the case of participating preference shares.

7. Convertible preference shares Convertible preference shares are those which are converted into equity shares at a specified rate on the expiry of a stated period. The holders of this kind of shares have a right to convert their shares into equity shares within a specified period. For example, a 100 Rupee preference share may become convertible into 10 equity shares of Rs.10 each.

8. Non-Convertible preference shares 6

www.finsia.com/docs/default-source/jassa-new/jassa-1983/redeemable-preference-sharefinancing.pdf?sfvrsn=8aa1b393_2 6

Convertible preference share may also have cumulative or participating rights. This kind of preferred stock is ideal from the view point of the investor. Non-convertible preference shares are not converted into equity stock. Non-convertible preference shares may also be redeemable. The holders of this kind of shares have no right to convert their preference shares into equity shares.

Memorandum of Association and Articles of Association: The rights of preference shares must be mentioned in the Memorandum of Association and Articles of Association. • Preference shareholders cannot claim any other rights apart from those expressly mentioned in the MOA or AOA. • Companies cannot allot preference shares if they are not mentioned in the MOA or AOA of the company. Why do companies issue preference shares7 • Issuing equity shares would mean diluting ownership rights. Therefore, to safeguard ownership rights, companies issues preference shares. • Companies issue preference shares because they wouldn’t want to avail loans. • Companies issue preference shares because they give maximum flexibility, without the fear of missing interest payments. In case companies issue bonds, a missed interest payment puts the company at risk of defaulting on an issue. This results in forced bankruptcy.

Why do investors like preference shares? 7

https://accountlearning.com/preference-shares-meaning-kinds-of-preference-shares/ 7

• Investors like to invest in preference shares because these shares enjoy preference over equity shares, vis-a-vis dividends. • Investors like banks and institutional investors like to invest in preference shares because they want to avoid the risk of fluctuating equity share prices. • Preference shares are a combination of equity shares and bonds. Therefore, these are relatively stable. • Shareholders prefer to invest in preference shares because it offers consistent dividend payments minus lengthy maturity dates like bonds. • Preference shares are less risky when compared to equity shares.

When the Company is in Distress Besides voting rights, the major difference between common and preferred shareholders becomes apparent when the company is in distress. While the company is not obligated to make dividend payments to ordinary shareholders, it must still pay out on its preferred shares. When there's no money in the coffers, the dividend becomes a liability which the company must honor at some point in the future. In liquidation, preferred shareholders receive their share of the company's assets after secured creditors and bondholders have been paid off but before common shareholders receive a cent – that's why these shareholders are called "preferred." Common shareholders are last in the chow line at feeding time. They receive nothing until all other claims have been fulfilled.

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HOW SHARES ARE MADE PUBLIC FOR THE FIRST TIME Shares are made public through an initial public offering using a book building process. 1. Initial Public Offering (IPO) Initial public offering (IPO) is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to increase, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer gets the assistance of an underwriting firm, which helps in determining what type of security is to be issued (common or preferred), the most suitable offering price and the proper time to bring it into the market. IPOs are a risky investment as it is tough to predict what the share will do on the trading day as well as in near future because, there is no substantial historical data to analyze the company’s standing. In addition to that the companies up for an IPO undergo a transitory growth period which is subjected to uncertainty for future values. 2. Book Building Process In order to raise money, a company plans on offering its stock to the public and this process is called Book building process. This process is used either by an IPO (Initial public offering) or FPO (follow-on public offers) for effective price discovery. It is a mechanism where, during the tenure for which the IPO is open, bids are collected and compiled from investors at various prices, which are higher or equal to the floor price (lowest price at which bids can be made). The offer price is decided after the bid closing date. As soon as the cost of the stock is determined, the issuing company can then decide upon the division of its stock to its bidders.

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TRADING IN THE STOCK MARKET The most common way of buying/selling shares in stock market is via trading through exchanges, where buyers and sellers meet and decide on a trading price. Through a stockbroker you can buy shares from existing investors who wish to sell them and vice versa. There are also some exchanges which are physical location known as trading floors, where often trading is carried out. You might have come across in pictures where traders are yelling, waving up their arms wildly in air. The other means of exchange is virtual and is carried out via a network of computers where trading can be done electronically. The aim of a stock market is to simplify the exchange of securities between buyers and sellers which can in turn reduce the risks associated with investing. So a stock market can be considered as a super-sophisticated market providing a linkage between buyers and sellers. It’s important to have a sound knowledge between Primary and Secondary Market if someone wishes to trade. 1. Primary Market Primary market is where the securities are made via an IPO. 2. Secondary Market Secondary market is where investors trade the already-issued securities without involving the issuing companies. It is what people refer to when they are talking about the stock market. An investor or stake holder have to trade through registered brokers/brokerage houses of the stock exchanges and it doesn’t require the direct involvement of the company. Each stock exchange has a number of brokers/brokerage houses which are registered with the commission. Registered Brokers/brokerage houses are allowed to engage in execution of trade on others' behalf as per the laws, rules and regulations. The following points are of key importance if you are opting for trade.

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

To ensure protection against fraud and misrepresentation an investor should trade only through registered brokers/brokerage houses and agents.



To verify authenticity of brokerage house/brokers/agents registration, SECP has uploaded a list of registered brokers and agents of the Stock Exchanges on its website8 It is important to note that the registration of all the brokerage houses/brokers and agents are valid for a period of one year which is subject to annual renewal.



Make regular enquiries from your broker/



If you come across any unregistered/illegal broker/agent, please report the same immediately to the SECP as it is in your own interest and in the general interest of other investors.



The list of registered brokerage houses/brokers and agents can also be found on respective websites of the Exchanges.

TYPES OF SHARES9 Authorized shares comprise the number of shares a company’s board of directors may issue. Issued shares comprise the number of shares that are given to shareholders and counted for purposes of ownership. Because shareholders’ ownership is affected by the number of authorized shares, shareholders may limit that number as they see appropriate. When shareholders want to increase the number of authorized shares, they conduct a meeting to discuss the issue and establish an agreement. When shareholders agree to increase the number of authorized shares, a formal request is made to the state through filing articles of amendment.) It's common for companies to have different classes of shares, each of them conferring different rights to shareholders, such as voting power and the right to dividends or capital.

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(www.secp.gov.pk).

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C.R. DATTA, DATTA ON THE COMPANY LAW 29 (2008) Pg.1.903

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1. Ordinary shares Most companies only have one kind of shares, called ordinary shares. Ordinary shares represent the company’s basic voting rights and reflect the equity ownership of a company. Ordinary shares typically carry one vote per share and each share gives equal right to dividends. These shares also give right to the distribution of the company’s assets in the event of winding-up or sale. The rights attached to ordinary shares are generally defined in the Articles of association of the company and/or in the shareholders agreement. 2. Deferred shares Deferred shares carry fewer rights than ordinary shares and can include: 

shares in which dividends are only paid after all other classes of shares have been paid



shares in which dividends are only paid after a certain date or event



shares that are not tradable until a certain date - such shares are usually issued to employees in order to give them a long term interest in the company and to increase their loyalty, or



shares which, in the event of insolvency, do not give their holders any rights until all other shareholders are paid.

3. Non-voting shares Non-voting shares do not give the holder any voting rights in the company. This means that the holder is entitled to a portion of the company’s capital, but is not able to take part in its general meetings. Non-voting shares are mostly issued to employees or to family members of the main shareholders. This class of shares allows the main shareholders to retain control of the company whilst multiplying the number of shareholders.

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4. Redeemable shares Redeemable shares are shares that can be bought back by the company at some point in the future. The redemption date can either be fixed in advance (eg 3 years from the date the share is issued) or decided at the company's discretion. The redemption price is usually the same as the issue price, but not necessarily. Shares given to employees are often redeemable, so that the company can get its shares back if the employee leaves. However, the ability to redeem shares is limited and is subject to specific statutory requirements. For instance, the company may only redeem the shares out of accumulated profits or the proceeds of a new issue of shares. 5. Preference shares10 Preference shares give their holder a preferential right to a fixed amount of dividend, meaning that they will receive dividends ahead of ordinary shareholders. Preferred shareholders also have a higher priority claim to the company’s assets in case of insolvency. Because this class of shares carries many benefits and guarantees, it is mostly issued to investors, for example to venture capitalists, who invest in startups. However, preferred shareholders do not have the same ownership rights in the company as ordinary shareholders; they are often nonvoting and sometimes redeemable. Redeemable preference shares are a common way of financing a business. They allow a company to repurchase its shares in the future (eg if interest rates fall and the company wants to issue new shares with a lower dividend rate), while giving investors the possibility to get their money back at a pre-agreed price. 6. Management shares Management shares give their holders extra voting rights at the company’s general meetings (eg two votes for one share). Such shares are often used to enable company directors to retain control of the company in the event of shares being issued to outside investors.

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Surya Kant Gupta v. Rajaram Corn Product Pvt. Ltd., (2008) 84 CLA 310 (CLB)

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7. Alphabet shares Alphabet shares are a subclass of ordinary shares, which allow a company to vary the the rights attached to shareholders. Although each class of shares can be given a descriptive name, eg non-voting shares, preference shares or redeemable shares, it’s common to just label share classes with alphabet letters (A, B, C, D, etc. depending on the number of subgroups a company wishes to create), each class conferring different voting rights, rights to dividends and rights to capital. Alphabet shares therefore enable companies to enhance or restrict certain shareholders’ rights. For example, ''A shares'' can have a greater rate of dividend than ''B shares'', so that for the same number of shares, owners of A shares receive more than owners of B shares.11 Other classes Any class of shares may be created. Sometimes different classes are set up for particular purposes, such as the following arrangements: 1. Voting shares, dividend shares, capital shares Sometimes three classes of shares are created with class 'A' having all the voting rights, class 'B' having all the dividend rights and class 'C' having all the capital rights. It is then possible for the different shareholders to have different percentages of the rights for these purposes. As a simple example, Shareholder 1 may have 40% of the voting rights ('A' shares), 50% of the dividend rights ('B' shares) and 60% of the capital rights ('C' shares). Shareholder 2 then has 60% of the votes, 50% of the dividends and 40% of the capital. 2. Deadlock articles In a company with two investors, A and B (perhaps a joint venture between two unrelated companies) the company may have two classes of shares, A shares and B shares. The shares may carry the same rights but are intended to protect both A and B in certain ways, e.g. the articles may provide for, say, two directors to be nominated by the holders of the A shares and two by the holders of the B shares, etc. 11

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3. Changing class rights There is some statutory protection given to the holders of a class of shares against the rights on their shares being altered. A minority class of shares, or a class of non-voting shares, would otherwise be vulnerable to the rights on those shares being altered by the majority (e.g. by altering the articles by special resolution). This is known as a variation of class rights. Full consideration of this complex area is outside the terms of this database, but the following is a summary of the main statutory provisions:CA 2006, sec630 provides that class rights may be varied only in accordance with the articles or if either:(a) the holders of three-quarters in nominal value of the issued shares of that class consent in writing to the variation; or(b)a special resolution (75% majority) is passed at a separate general meeting of the holders of that class to sanction the variation.CA 2006, sec633: The holders of not less than 15% of the issued shares of the class (being persons who did not consent to or vote in favour of the resolution for the variation), may apply to the court to have the variation cancelled. Converting shares from one class to another There is no statutory procedure for converting shares from one class to another. It may be done with the consent of all the shareholders affected.The safest course is to pass a resolution to which all the shareholders consent because, in practice, changing the rights on one person's shares may well have an effect, at least in practice on the rights of all the other shareholder.

Why Do Companies Issue Shares & Why Do Investors Buy Them12

Many small businesses operate as corporations in the United States, because corporations provide legal rights and protections that many business structures do not. A corporation is an excellent structure by which a business can raise capital. Corporations are owned by their shareholders, who may change over time, and they exist into perpetuity or until dissolved. Companies issue shares and investors purchase those shares for a variety of reasons.

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https://smallbusiness.chron.com/companies-issue-shares-investors-buy-them-76649.html

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Recording Ownership Stake

Corporations issue shares to shareholder founders to record their ownership stake in the business. Some corporations at startup issue sweat equity shares – shares provided at no cost or below fair market value – to founders in exchange for services rendered. Founders often contribute cash for shares soon afterward to capitalize the firm, which means they inject enough cash to cover the short-term and medium-term costs of startup and operations.

Raising Start-up Capital

Early stage corporations issue shares to nonfounders to raise money to offset startup costs, including attorney fees, rent, security deposits, insurance, marketing, product purchases, business travel, equipment and furniture. Typically companies incur extensive startup expenses well before they begin generating revenue.

Opportunities for Family and Friends

Founders try to cover startup costs with personal equity or loans, but when they need additional funding beyond this, they typically turn to friends and family. Members of this investor group often believe in the entrepreneur and her ability to make a company successful, and they can be counted on for loyalty even when the company has little revenue and no profits. Friends and relatives buy shares to support a loved one -- and to take a gamble at making money in the process.

Expansion and Strengthening

Young corporations issue shares to external investors to raise money for expansion. Unlike debt, equity does not require repayment and therefore does not stress a young or growing company’s cash flow. In addition, equity strengthens the balance sheet. Prospective lenders generally prefer to see a debt to equity ratio of one or lower. Young companies that aren't profitable or funnel profits back into the company have no retained earnings. They must rely on share issuance to 16

provide equity. Older, more stable corporations may issue shares to retire existing debt.

Building Wealth

Investors buy shares in small, private corporations to generate wealth for themselves in the form of a return on their investment. That return comes from dividend distributions or profit retention that increases share value. Investors examine the historical and projected financials -- revenue growth, profit margins, return on equity -- as indicators of potential return. They review the company’s goals and strategies. Investors often focus most on the management team that drives the company’s accomplishments. When investors have the funds and believe they can generate a healthy return, they will purchase stock in the company. Some investors invest larger sums to obtain a larger ownership stake or a board seat that allows them to influence company decisions. preference Shares

ordinary Shares

Shareholders have a preferential right in

Shareholders are entitled to dividends as

terms of entitlement to receipt of dividends

well as residual economic value should the

as well as repayment of capital in the event

company unwind (after bondholders and

of the company being wound up.

preference shareholders are paid).

They offer shareholders a fixed dividend

Ordinary shareholder dividends can be

each year.

higher

than

preference

shareholder

dividends as dividends for ordinary shares are not fixed. Shareholders have no voting rights and in the event of non-payment of dividends may

Ordinary shareholders have the right to

have a cumulative dividend feature that

vote at Annual General Meetings and they

requires all dividends to be paid before any

have the ability to elect the Board of

payment of common share.

Directors of a company .

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THE SIGNIFICANCE OF SHARES13 There are many benefits to investing. Let’s find out how this common form of investment can be an effective way to make money. Here are some of the benefits of investing in shares. 1. Capital Growth Selling a share for more than you paid for it is known as Capital Gain. This occurs when an individual experiences significant rise in share prices and is one of the long term objectives of investing in shares. 2. Dividends Dividend is a cash reward given out to shareholders as part of the profit made by the company at the end of each financial year. The larger the units of the shareholdings one possesses, the more money one receives. 3. Liquidity By nature, shares that are listed are a very liquid product and can be bought and sold quickly over an exchange platform. No hassle of involving a broker or transferee and at a relatively low cost as compared to other financial products. Trading on an exchange also allows one to sell part of the share parcels other than redeeming the whole lot. 4. Shareholder Benefits Some listed shareholder companies from

different market sectors including

entertainment, retail, hospitality and financial services offer lavish discounts to shareholders when they buy goods or services from the companies or their affiliates. However in most scenarios, lots of shares need to be owned to qualify for such benefits. 13

https://www.investopedia.com/ask/answers/05/pricechangeaffectcompany.asp#ixzz5UlQzuznE 18

RISKS ASSOCIATED WITH INVESTMENT IN SHARES14 Shares can be a sound long-term investment but of course there are always risks to be considered as with any type of investment. These include the following: 1. Volatility Share values can be volatile and can fall dramatically in price, even to zero. 2. Credit Risk Owners of ordinary shares are generally the last in the line of creditors if a company fails and there may be no chance of getting any money back. 3. Unexpected Events Unexpected events which are outside of your control, such as company specific bad news, a change in government policy or natural or man-made disaster can seriously affect share prices.

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C.R. DATTA, DATTA ON THE COMPANY LAW 29 (2008) Pg.1.8393

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CONCLUSION A share is a right to a specified amount of the share capital of a capital of company carrying with that certain rights and liabilities while the company is a going concern and in its winding up. A share holders who buys shares does not buy an interest in the company is that on by an investor becomes entitled to participate in the profits of the company if and when the company declares, subject to article, that the profits or any proportion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly for the right to participate in the assets of the company which would be leftover after winding up. The shares or other interest of any other member in a company a personal estate transferable in the manner provided by its articles, and are not of the nature of real estate. The company which owns the property and not the shareholder. The shareholders are not in the eyes of the law part owners of the undertaking. The shareholders in the company are not partners inter se.15

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Mrs. Bacha F. Guzdar v. CIT AIR 1955 SC74

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