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
|Basis||Equity shares||Preference Shares|
|(i) Choice||It is compulsory to issue these shares.||It is not compulsory to issue these shares.|
|Dividend is paid on these shares only after paying dividend on preference shares.||Dividend is paid on these shares in preference to the equity shares.|
|(iii) Return of
|In case of winding up of the company the equity share capital is refunded only after the refund of preference share capital.||In case of winding up of the company the capital is refunded in preference over the equity shares.|
|The equity shareholders enjoy voting rights.||The preference shareholders do not have voting rights.|
|The dividends on equity shares are not accumulated and therefore cannot be carried forward.||
The unpaid dividends are accumulated and are carried forward to the future years in case of cumulative preference shares.