These shares have certain privileges and preferential rights such as to payment of dividends, return of capital, etc.
Preference Share has which fixed rate of dividend is prescribed at the time of issue.
The preference shareholders are co-owners but not controllers.
They are cautious investors as they are interested in the safety of the investment.
(i) Cumulative Preference Shares:
- Cumulative preference shares are those shares on which dividend accumulates until it is fully paid.
- That is if the dividend is not paid in one or more years due to inadequate profit, then such unpaid dividend gets accumulated and is carried forward till next year.
- The accumulated dividend is paid when the company performs well.
- The arrears of dividends are paid before making payment to equity shareholders.
- The preference shares are always cumulative unless otherwise stated in Articles of Association.
(ii) Non-Cumulative Preference Shares:
- The dividend on these shares does not accumulate.
- That is the dividend on shares can be paid only out of profits of that particular year.
- The right to claim dividends will lapse if the company does not make a profit in that particular year.
- If the dividend is not paid in a year, it is lost.
(iii) Participating Preference Shares:
- The holders of these shares are entitled to participate in surplus profit besides preferential dividends. They participate in the high-profit condition of the company.
- Surplus profit here means excess profit that remains after making payment of dividends to equity shareholders.
- Such surplus profit up to a certain limit is distributed to preference shareholders.
(iv) Non-Participating Preference Shares:
- The preference shares are deemed to be nonparticipating if there is no clear provision in Articles of Association regarding participation in surplus profit.
- Such shareholders are entitled to receive a fixed rate of a dividend prescribed in the issue.
(v) Convertible Preference Shares:
- These shares have a right to convert their preference shares into equity shares.
- The conversion takes place within a certain agreed fixed period.
(vi) Non-Convertible Preference Shares:
- These shares are not converted into equity shares.
- They will remain as preference shares forever till paid back.
(vii) Redeemable Preference Shares:
- Shares that can be redeemed after a certain fixed period are called redeemable preference shares.
- A company limited by shares if authorized by Articles of Association issues redeemable preference shares.
- Such shares must be fully paid.
- The shares are redeemed out of divisible profit or out of the fresh issue of shares made for this purpose.
(viii) Irredeemable Preference Shares:
- Shares which are not redeemable are payable only on winding up of the company and are called irredeemable preference shares.
- As per section 55(1) of the Companies Act 2013, the company cannot issue irredeemable preference shares in India.
- Thus, are the types of preference shares.
