Preference Shares – Meaning and Types

Preference Shares - Meaning and Types

According to Section 42 of The Companies Act, 2013, a preference share is one, which fulfills the following conditions:

a) That it carries a preferential right to dividend, as a fixed amount or at a fixed rate before any dividend is paid to the equity shareholders.

b) On the winding-up of the company, the preferential right to the repayment of capital before anything is paid to equity shareholders.

TYPES OF PREFERENCE SHARES

1. Cumulative and Non-Cumulative Preference Shares

The preference shares enjoying the right to accumulate unpaid dividends in the future years are known as cumulative preference shares. On non-cumulative shares, dividend is not accumulated if it is not paid in a particular year.

2. Participating and Non-Participating Preference Shares

Preference shares which have a right to participate in the surplus profits of a company after the payment of equity dividend at a certain rate are called participating preference shares. The non-participating preference shares do not enjoy such rights.

3. Convertible and Non-Convertible Preference Shares

Preference shares that can be converted into equity shares within a specified period of time are known as convertible preference shares. Non-convertible shares are such, which cannot be converted into equity shares.

4. Redeemable and Irredeemable Preference Share

Preference shares having a fixed date of maturity are called as redeemable preference share. Where the amount of the preference shares is refunded only at the time of liquidation, are known as irredeemable preference shares.

Difference between Equity Shares and Preference Shares