Your Exclusive Slice Towards Understanding Company Shares in Malaysia

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Your Exclusive Slice Towards Understanding Company Shares in Malaysia

November 12, 2021 incorp 0 Comments

Reading Time: 7 minutes – 

Company Shares are similar to those extravagant-looking cakes found in birthday celebrations; cut up into several slices of diverse sizes. 

 

This concept similarly applies to shareholders in a company as well. For this article, we’ll be exploring the various types of shares a Malaysian company distributes to its range of investors. With that, let’s begin…

About Shares

Shares, for those new to the concept of investment, are defined as units of financial assets that provides equal distribution from any of the company’s residual profits in the form of dividends, upon deduction of debt expenditures.

 

Oftentimes, the term of “shares” and “stocks” are used interchangeably however, in this case for our topic, we’ll be sticking with its official term of “shares”.

Share Categories in MalaysiaClasses of Shares:

In Malaysia, shares can be classified as either Ordinary or Preference Shares. Prior to that, it should be noted that some companies may have existing variants and classes of shares, with some even having identical rights. These mentioned shares may be displayed as Ordinary A and B for Ordinary Shares and Preference A and B for Preference Shares.

 

Despite that, certain distinctions can be made between them in the following areas: –

 

i. Entitlements to Dividends

Shares that may have the right to normal dividends, preferential dividends, circumstantial dividends, or none at all.

 

ii.  Entitlement to Vote

Which can be as simple as either shares carrying voting rights or not, but sometimes weighted or tiered votes are inclusive in certain circumstances.

 

iii. Entitlement to Capital on Winding Up/Disposal

Where if the company wounds up, any assets left after all debts have been paid off will be distributed to shareholders. Different classes of shares may have different rights to capital distribution.

Types of Shares in Malaysia

Next, listed below are the various types of shares classified within the two mentioned categories, along with an in-depth explanation for each one: –

i.  Ordinary Shares

Ordinary Shares are defined as the type of shares granting holders the ability to vote on shareholder’s resolutions, the right to attend, participate, speak at company meetings, and receive dividends or profits after preference shareholders have been paid.

 

Ordinary Shares Sub-CategoriesSub-Category Details
a. Cash Shares

– Fully paid-up shares are those that have no outstanding amounts due. Due monies for the equity issued have been paid to the company in full.

For example,

Company issues shares relative to value of RM100.

Payment of RM100 received in full.

– Alternatively, companies are also able to distribute partly paid-up shares where the received payment for them amounts to less than the original agreed value:

For example,

A company issues 100 shares costing RM1 each.

Shareholders pay only RM0.75 for each share.

RM0.25 due for each RM1 share issued.

b. Non-Cash Shares

– Non-Cash Shares are shares that can be issued for consideration other than cash. They can be divided into two distinct forms, Tangible Assets and Intangible Assets.

– Tangible Assets describe assets that are physical and can be sensed by our five senses. Examples include industrial machineries, company properties, and more.

– Intangible Assets on the other hand refer to non-physical assets such as trademarks, copyrights, royalties, and more.

*Example of Application of Non-Cash Shares formed by Tangible and Intangible Assets: –

Company issues 20% shares to you amounting to RM600,000.

Following, you can pay for the consideration other than the use of cash that’s equal to the shares’ given value: –

(For example, investing in the company a piece of machinery which costs RM300,000 (Tangible Asset) and RM300,000 worth in company IP (Intangible Asset)).

ii. Preference Shares

Preference Shares refer to shares handed out by companies to raise capital. They are considered as hybrid investments due to their potency in acting as either debt or equity. This gives them the status of a double-edged sword, which is dictated through the agreed terms and conditions.

 

To further explain on the share’s duo contrasting nature, we’ll be viewing it from the perspective of an investor: –

i. As a Loan – (Redeemable on the Option of Shareholders):

Your Invested Amount: RM100,000

Company’s Proposed Terms and Conditions:

Proposed Interest Rate: 5% per annum (EG: RM5) (p.a.)

Invested Years: 5 years

After 5 years:

RM5 x 5 years = RM25

Returns: RM100,000 + RM25 = RM100,025


ii. As an Equity – (Return of Investment Depends on Terms & Conditions):

Tabulation starts off similarly as with the Loan perspective above, however…

Upon concluding the initial terms and conditions period, the company maybe keen in further extending your investment agreement with them, with the promise of earning higher returns.

New Proposed Interest Rate: 10% per annum (p.a.)

RM100,025 + 5% + 10%

New Returns: RM100,125 (with addition 5% and 10% annual interest rates)

 

In addition, listed below are some examples of advantages Preference Shares provide when utilized:-

i.  Advantages of Preference Shares from Investor’s Perspective:

a. Unpaid Annual Dividend Accumulation

For Preference Shareholders, whenever the company fails to achieve profits for prior years, those unpaid dividends will be accumulated until the company achieves a financially stable position. This refers to a sub-category of Preference Shares dubbed, Cumulative Shares

 

For example: –

If company doesn’t not pay the investor for Year 1, 2, 3, and 4 (EG: RM500 per annum) consecutively because of economic downturn, the following would ensue: –

RM500 (Year 1) + RM500 (Year 2) + RM500 (Year 3) + RM500 (Year 4) = RM2000

 

Upon arrival of Year 5:

RM2000 (Accumulation of 4 years’ worth of unpaid dividends) + RM500 (Year 5)

Total Dividends Owed by the Company:

RM2500

 

b. Higher Prioritization over Claiming Company Assets

At any point in time if a company faces either bankruptcy or subsequent liquidation, Preference Shareholders need not worry as their dividends will still be distributed to them at a fixed rate upon paying off any initial debts owed to Suruhanjaya Syarikat (SSM or Commission of Companies Malaysia (CCM), creditors, and employees.

 

 


c. Additional Investor Benefits of Reaping Fixed Rated Profits (on condition the company meets certain predetermined profit targets)

Preference Shareholders have the opportunity of trading in their Preference Shares for a fixed number of common shares. This is similar to those held by Ordinary Shareholders as a result of yet another Preference Share’s sub-category, Convertible Shares.

In turn, this enables shareholders to reap higher returns from those lucrative years should the value of Ordinary Shares arise  compared to those only holding their standard Preference Shares which merely provides fixed return rates.

 

 

ii. Benefits of Using Preference Shares from Company’s Perspective:– Consolidation of company’s power due to lack of voting rights for preference shareholders

– Right to issue callable preference shares, permitting the company to purchase back those shares

– Flexibility in company’s structure whereby the company’s is able to repurchase back shares at market price whilst selling them at lower rates as a side-effect of Preference Shares’ sub-category, Redeemable Shares.

Comparison Between Ordinary & Preference Shares

But of course, with two distinct categories comes varying differences. Hence, listed below are some contrasting factors  between Ordinary and Preference Shares: –

 

a. Dividends:

When it comes to dividends, both shareholder types will definitely be paid however, Preference Shareholders usually take precedence in getting paid first prior to Ordinary Shareholders although at a constant fixed annual rate, let’s say 5% for example.

 

On the other hand, Ordinary Shareholders are paid based on profits garnered by the company, hence the returns acquired will depend on its performance. This means Ordinary Shareholders have the potential of reaping higher returns (7%) as compared to Preference Shareholders’ fixed return rate of 5%, making investment in banks looking more lucrative.

 

b. Voting Rights:

Pertaining to voting rights, Preference Shareholders have no voting rights unlike Ordinary Shareholders.

Certificate of Shares

In the past, Certificate of Shares were mandatory as proof for the ownership of shares. Today, shareholders have the option of attaining one as a form of safekeep to validate their claim over their respective company shares, courtesy of Section 97 of Companies Act 2016 (CA 2016).

Hence, issuers of those certificates are required to jot down the following details when issuing them within the span of 60 days upon receiving the receipt of an application: –

i.   Name of the company

ii.  Class type of shares held by the individual

iii. Quantity of shares held by the individual

When it comes to reporting to Shareholders, it can be truly a daunting task of having to prepare several essential documents such as Financial and Annual Reports as part of being  compliant with Companies Act 2016 (CA 2016) or heavy penalties would be certain.

 

Well, cast those worries aside! With Incorp as your trusted business partner, our seasoned team of professional company secretaries with 38 years worth of industry experience can safely assure that the process of preparing and compiling those documents adhere stringently to regulations, assuring you the peace of mind you truly deserve!

 

Interested? Feel free to connect with us via either our email or WhatsApp and we’ll revert to you as soon as possible: –

Email: secretarial@elegant.com.my

WhatsApp: 017-2727118

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