Preference Shares:
Preference shares are those which carry the following two rights:
- They have a right to receive dividend at a fixed rate before any dividend is paid on the equity shares.
- When the company is wound up they have a right to the return of capital before that of equity shares.
In addition to the above the preference shares may carry some more rights such as the right to participate in excess profits when a specified dividend has been paid on the equity shares or the right to receive a premium at the time of redemption.
Types of Preference Shares:
(i) Cumulative Preference Shares : Cumulative preference shares are those preference shares which carry the right to receive arrears of dividend before dividend is paid to the equity shareholders. For example, a company has 10,000, 7% preference shares of Rs 100 each and dividend for the years 2015 and 2016 has not been paid. The company earns adequate profits in the year 2017. In this case, the company shall pay Rs 2,10,000 as dividend for three years to the preference shareholders before dividend is paid to the equity shareholders.
(ii) Non-Cumulative Preference Shares: Non-cumulative preference shares are those preference shares which do not carry the right to receive arrears of dividend. In the above example, preference shareholders share be entitled to receive dividend only for the year 2017 i.e., Rs 70,000 before dividend is paid to equity shareholders.
(iii) Participating Preference Shares: The Articles of Association of a company may provide that after dividend has been paid to the equity shareholders, the holders of preference shares will also have a right to participate in the remaining profits. The preference shares carrying this right are called Participating Preference Shares.
(iv) Non-Participating Preference Shares : Preference shares which do not carry the right to participate in the profits remaining after equity shareholders have been paid dividend are Non-Participating Preference Shares.
(v) Convertible Preference Shares : Holder of these shares have a right to get their preference shares converted into equity shares at their option according to the terms of issue.
(vi) Non-convertible Preference Shares : When the holders of preference shares have not been conferred the right of getting their preference shares converted into equity shares, such shares are called Non-convertible Preference Shares.
(vii) Redeemable Preference Shares: Such shares are those which will be repaid by the company within a stipulated period in accordance with the terms of issue and the fulfillment of certain conditions laid down in Section 55 of the Companies Act, 2013.
(viii) Irredeemable Preference Shares : Irredeemable preference shares are those the capital of which cannot be refunded before winding up. According to Section 55 of the Companies Act, 2013, no company limited by shares shall issue any preference share which is irredeemable or is redeemable after the expiry of 20 years from the date of its issue.
