Section 43 of Companies Act 2013: How Share Capital Really Works in Indian Companies

Every company starts with capital. That capital decides who controls the company, who earns returns, and who carries risk. Yet, most people don’t look beyond the word “shares”.

That’s where Section 43 of the Companies Act, 2013 quietly plays an important role.

This section does not talk about fancy valuations or funding rounds. It simply lays down what kind of share capital a company can have. Clear categories. Clear rights. No confusion.

If a company is limited by shares, Section 43 recognises only two types of share capital. Nothing more, nothing less.

Equity shares and preference shares. That’s it.

Equity Share Capital – Where Control Actually Lies

Equity shares are what most people think of when they hear the word “shares”. These are the real ownership instruments of a company.

Equity shareholders usually get voting rights. One share, one vote. Simple.

Through these votes, shareholders approve directors, major decisions, and sometimes even the future direction of the business. That’s why equity matters so much.

But Section 43 also allows something slightly flexible here.

Companies can issue equity shares with differential rights. This means voting power or dividend rights can be changed. Founders may want stronger voting control. Investors may prefer higher dividends instead. The law allows this balance, as long as everything is disclosed clearly.

No hidden terms. No surprises later.

Preference Share Capital – Less Control, More Stability

Preference shares are different in nature.

They are designed for investors who want priority, not power.

Preference shareholders get:

• First right to dividends

• Priority in repayment of capital if the company is wound up

In most cases, preference shares carry a fixed dividend. This makes them attractive to investors who prefer steady returns instead of fluctuating profits.

Voting rights? Usually no. Except in certain legal situations.

Section 43 ensures that companies clearly state these rights upfront so that investors know exactly what they are buying into.

Why the Law Separates These Two Clearly

This separation is intentional.

If rights are mixed casually, disputes arise. Shareholders fight. Companies face litigation. Trust breaks down.

By clearly defining equity and preference share capital, Section 43 protects:

• Investors, by ensuring transparency

• Companies, by reducing future conflicts

• Regulators, by standardising capital structures

It keeps things clean. And predictable.

Issuing Shares Is Not Just a Paper Exercise

Issuing shares under Section 43 isn’t something companies can do casually.

There are steps involved. Real ones.

Board approval comes first. Then shareholder consent, where required. After that, proper offer documents must be issued. Whether it’s a prospectus or a private placement letter, the rights attached to shares must be clearly written.

Finally, filings with the Registrar of Companies are mandatory.

For public companies, SEBI rules also step in. Compliance is non-negotiable.

Skipping steps here usually comes back as penalties later.

Differential Rights – Useful, But Sensitive

Equity shares with differential rights are powerful tools. But they are also sensitive.

Companies use them to:

• Retain promoter control

• Attract strategic investors

• Structure funding smartly

But misuse or poor disclosure can cause serious shareholder disputes.

Section 43 doesn’t ban differential rights. It simply demands honesty. Clear disclosure in documents. That’s all.

Preference Shares in Real Business Use

In practice, preference shares are often used when companies want funds without diluting control too much.

Investors get fixed returns. Promoters retain voting power.

But even here, terms must be properly documented. Dividend rate. Redemption terms. Priority rights. Everything.

Section 43 makes sure there is no ambiguity.

Impact on Corporate Governance

This section may look basic, but it quietly strengthens governance.

When rights are clearly defined:

• Investors feel safer

• Management knows its limits

• Decision-making becomes smoother

Companies that follow Section 43 properly rarely face shareholder disputes related to capital structure.

That alone says a lot.

Practical Things Companies Should Actually Do

On the ground, companies should:

• Maintain accurate shareholder registers

• Clearly define rights for each class of shares

• Ensure board and shareholder approvals are in place

• Follow SEBI rules where applicable

• Periodically review share capital records

Most problems don’t arise from bad intent. They arise from sloppy compliance.

FAQs on Section 43 of Companies Act 2013

What types of share capital are allowed under Section 43?
Only equity share capital and preference share capital.

Are differential rights allowed in equity shares?
Yes, but they must be clearly disclosed and legally compliant.

Do preference shareholders get voting rights?
Generally no, except in specific situations prescribed by law.

Final Words

Section 43 of the Companies Act, 2013 may not sound dramatic, but it forms the backbone of how ownership and returns are structured in Indian companies.

By clearly defining equity and preference share capital, the law protects investors, improves transparency, and brings discipline to corporate financing.

Companies that respect this framework build trust. And trust, in the long run, is more valuable than capital itself.

If you need professional help with share issuance, preference shares, differential rights, or Companies Act compliance, Callmyca.com offers expert support to keep your structure clean and legally sound.