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PURE INSTRUMENTS: PREFERENCE SHARES

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Preference Share Capital means a share capital which has preferences over equity shares in respect of dividend and capital. Preference shareholder has two types of preference over equity shares: 

(i) Payment of Dividend

(ii) Payment OF Capital at the time of Liquidation  In other words, preference share means a part of issued share capital which has preferential rights in respect of dividends and capital in case of winding – up. 

Note: No Company shall issue preference shares which are irredeemable. 

KINDS OF PREFERENCE SHARES:

Cumulative Preference Shares: Preference shares shall be treated as cumulative or non – cumulative with regard to the payment of dividends. A cumulative preference share confers a right on its holder to claim fixed dividend of the past years, current years and also on future year‟s profits. The dividend keeps on accumulating until it is fully paid. 

Non – Cumulative Preference shares: A non – cumulative preference share gives right to its holder to receive dividend out of the current financial year profits. If no profits are available in current financial year, the preference shareholders get nothing and they cannot claim unpaid dividend in subsequent year. 

Convertible Preference Shares: The preference shares which carry with it the right to be converted into the equity shares after the expiry of a period is called convertible preference shares. 

Redeemable Preference Shares (Section 55 of the Companies Act, 2013): If the articles of association of a company provide, the redeemable preference shares can be issued subject to the following conditions:- 

(i) These preference shares are redeemable after a specific period and money is returned to shareholders.

(ii) A Company cannot issue preference shares which are irredeemable.

(iii) The Company can issue preference shares which are redeemable not later than 20 years. 

Note: A Company engaged in infrastructure projects can issue shares redeemable exceeding 20 years. 

Special Note: In case a company engaged in the setting up and dealing with infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years. Subject to the redemption of a minimum 10% of such preference shares per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders. 

Irredeemable Preference Shares: The kinds of shares which are not redeemable except on the happening of certain events such as winding up etc are known as irredeemable preference shares.

Note: The Companies are prohibited to issue irredeemable preference shares and in case of redeemable preference shares, the issuer company must redeem the preference shares within 20 years from the date of its issue. 

Participating Preference Shares: The kinds of preference shares which have the right to participate in the profits left after all the dues are paid to others are called as participating preference shares. 

Non – Participating Preference Shares: The kinds of preference shares who have no other right in addition to the fixed dividends are called as non – participating preference shares.

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