Question

Define 'preference shares'. Explain various types of preference shares. 

Answer 1

Types of Preference Shares are : (1) Cumulative Preference Shares—Cumulative preference shares are those shares on which dividend is accumulated till it is fully paid. This means i.e., if the company is not in a position to pay dividend to the preference shareholders in a particular year, it will be paid off in the next year. Preference shares are always cumulative unless and otherwise stated in Articles of Association.

(2) Non-cumulative Preference Shares—Are those shares on which dividends does not accumulate i.e., if the company is not in a position to pay dividend to preference shareholders in a particular year, it will lapse and will not be carried forward to the next year. 

(3) Participating Preference Shares—These prefe-rence shareholders are eligible to participate in surplus profits besides preferential dividends. These shareholders participate in the prosperity of the business. The surplus profit which remains after the dividend payment to equity shareholders, is distributed to preference shareholders.

(4) Non-participating preferencce shares—The preference shares are deemed to be non-participating, if there is no clear provision in Articles of Association. They are entitled to only fixed dividends as decided at the time of issue.

(5) Convertible Preference Shares—These shareholders have right to convert their preference shares into equity shares after certain period of time.

(6) Non-convertible Preference Shares—These shares can't be converted into equity shares during its tenure. They remain as preference shares only until they are repaid or redeemed.

(7) Redeemable Preference Shares—Redeemable preference shares are those which are redeemed after particular period along with their dividend. The period of redemption of such shares is determined at the time of issue of shares itself.

(8) Irredeemable Preference Shares—These are such shares which are not redeemable or paid back during the life time of the company. It is paid only at the time of winding up of the company. As per the Companies Act (Amendment made in 1988), the company is prohibited to issue Irredeemable Preference Shares.