Preference shares, with reference to any company limited by shares, are those which carry two preferential rights over other classes of shares: (a) a preferential right in respect of a fixed dividend it may consist of a fixed amount or a fixed rate, (b) a preferential right as to repayment of capital in the case of winding up of the company in priority to other classes of shares. “Preference share capital” is the sum total of preference shares. [Sec. 85 (1)]
Different types of Preference shares are as follows:
1. Cumulative Preference Shares:
A cumulative preference share has a right to claim the fixed dividend of the current year out of the future profits. The dividend, in these shares, accumulates unless paid. The accumulated arrears of dividend are to be paid before anything is paid out of the profits to the holders of any other class of shares.
Image Source: ssaainsiderblog.files.wordpress.com
ADVERTISEMENTS:
If a company is unable to earn sufficient profits in any year to pay dividend on preference shares, the deficiency is made good out of the profits of the subsequent years. Preference shares are always cumulative unless otherwise expressly stated in the Articles of Association.
2. Non-cumulative Preference Shares:
Dividend on non-cumulative preference shares can be paid only out of the profits of that very year, and is not allowed to accumulate to be paid out of the profits of the future years. The right to claim dividend will lapse if there are no profit in a particular year.
3. Participating Preference Shares:
Besides a fixed rate of dividend, the holders of these shares are also entitled to participate with the equity shareholders in the surplus profits which remain after paying dividend to equity shareholders up to a certain limit.
ADVERTISEMENTS:
They may also be entitled to get a share in the surplus assets of the company on its winding up. Unless expressly provided in the articles, preference shares shall be presumed to be non-participating.
Further, right to participate in the surplus profit does not automatically entitle them to participate in the surplus assets also at the time of the winding up of the company.
4. Non-participating Preference Shares:
The holders of these shares are entitled only to a fixed rate of dividend and do not share in the surplus profits. The whole of the surplus profits will, thus, go to the equity shareholders.
5. Convertible Preference Shares:
The holders of the shares have a right to get converted their preference shares into equity shares within a certain period.
6. Non-convertible Preference Shares:
ADVERTISEMENTS:
These preference shares do not carry the right of conversion into equity shares.
7. Redeemable Preference Shares:
Shares which can be redeemed after a fixed period or after giving a certain notice at any time at the will of the company out of the profits of the company or sale proceeds of the new shares are called redeemable shares. Conditions of their issue have been discussed later in this chapter.
8. Irredeemable Preference Shares:
They are of the nature of a permanent and perpetual liability which cannot be redeemed during the lifetime of the company. According to the Companies (Amendment) Act, 1988, no company can now issue any preference shares which are irredeemable or are redeemable after 20 years from the date of the issue.