Question

Describe the different types of preference shares.

State the various types of preference shares.

Explain the type of preference shares in detail.

Answer 1

1. Cumulative Preference Shares: Cumulative Preference Shares are those shares on which dividend goes on accumulating until it is fully paid. This means if the dividend is not paid in one or more years due to inadequate profits, then this unpaid dividend gets accumulated. This 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 the Articles of Association. It means that if a dividend is not paid any year, the unpaid amount is carried forward to the next year and so on, until all arrears have been paid.
2. Non-cumulative Preference Shares: Dividend on these shares does not get accumulated. This means the dividend on shares can be paid only out of profits of that year. The right to claim dividend will lapse if company does not make profit in that particular year. If dividend is not paid in any year, it is lost forever.
3. Participating Preference Shares: The holders of these shares are entitled to participate in surplus profit besides preferential dividend. The surplus profit which remains after the dividend has been paid to equity shareholders, up to a certain limit, is distributed to preference shareholders.
4. Non-participating Preference Shares: The preference shares are deemed to be non-participating if there is no clear provision in the Articles of Association. These shareholders are entitled to a fixed rate of dividend, as prescribed at the time of issue.
5. Redeemable Preference Shares: Shares which can be redeemed after a certain fixed period of time are called redeemable preference shares. A company limited by shares, if authorised by Articles of Association, issues redeemable preference shares. Such shares must be fully paid. These shares are redeemed out of divisible profit only or out of a fresh issue of shares made for this purpose.
6. Irredeemable Preference Shares: Shares which are not redeemable, i.e., payable only on winding up of the company, are called irredeemable preference shares. As per Section 55(1) of the Companies Act 2013, a company cannot issue irredeemable preference shares.
7. Convertible Preference Shares: The holders of these shares have a right to convert their preference shares into equity shares. The conversion takes place within a certain fixed period.
8. Non-convertible preference shares: These shares cannot be converted into equity shares.