Question

Long Answer Question

What is a ‘Preference Share’? Describe the different types of preference shares.

Answer 1

Preference Shares: Section 85 of the Company Act,1956 defines Preference Shares to be featured by the following rights:

a. Preference Shares entitle its holder the right to receive dividend at a fixed rate or fixed amount.

b. Preference Shares entitle its holder the preferential right to receive repayment of capital invested by them before their equity counterparts at the time of winding up of the company.

Types of Preference Shares

The different types of Preference Shares are diagrammatically explained below.

Answer 2

Preference Shares: Section 85 of the Company Act,1956 defines Preference Shares to be featured by the following rights:

a. Preference Shares entitle its holder the right to receive dividend at a fixed rate or fixed amount.

b. Preference Shares entitle its holder the preferential right to receive repayment of capital invested by them before their equity counterparts at the time of winding up of the company.

Types of Preference Shares

The different types of Preference Shares are diagrammatically explained below.

1. On the basis of Dividend:

a) Cumulative Preference Shares

When a preference shareholder has a right to recover any arrears of dividend, before any dividend is paid to the equity shareholders, then the type of Preference Shares held by the shareholder is known as Cumulative Preference Shares. All Preference Shares are cumulative unless otherwise expressly stated to be non cumulative.

b) Non Cumulative Preference Share

When a preference shareholder receives dividend only in case of profit and is not entitled any right to recover the arrears of dividend, then the type of Preference Shares held by the shareholder is known as Non Cumulative Preference Shares.

2. On the basis of Participation:

a) Participating Preference Share

When a preference shareholder enjoys the right to participate in the surplus profit (in addition to the fixed rate of dividend) that is left after the payment of dividend to the equity shareholders, the type of shares held by the shareholder is known as Participating Preference Share.

b) Non participating Preference Share

When a preference shareholder receives only a fixed rate of dividend every year and do not enjoy the additional participation in the surplus profit, then the type of shares held by the shareholder is known as Non Participating Preference Shares.

It must be noted that all Preference Shares are non-participating until and unless expressly stated.

3. On the basis of Redemption:

a) Redeemable preference share

When a preference shareholder is repaid by the company after a certain specified period in accordance with the term specified in the Section 80 of Company Act of 1956, then the type of the shares held by him/her is known as Redeemable Preference Shares.

b) Non Redeemable Preference share

These shares are not repaid by the company during its lifetime. As per the Section 80A of the Company Act of 1956, no company can issue Non Redeemable Preference Shares. It is merely a theoretical concept.

4. On the basis of Convertibility:

a) Convertible Preference Share

The shareholders holding Convertible Preference Shares have a right to convert his/her shares into equity shares.

b) Non Convertible Preference Share

Unlike Convertible Preference Shares, the shareholders holding Non Convertible Preference Shares do not enjoy the right to convert their shares into equity shares.