Types of Preference Shares

The important types of Preference Shares are as follows:

• Cumulative – Irrespective of the fact of profit or no profit in a year, the Dividend has to be paid and in case of no profit in a particular, the same gets accumulated. A preference share is said to be cumulative when the arrears of dividend are cumulative and such arrears are paid before paying any dividend to equity shareholders. Suppose a company has 10,000 8% preference shares of Rs. 100 each. The dividends for 1987 and 1988 have not been paid so far. The directors before they can pay the dividend to equity shareholders for the year 1989, must pay the pref. dividends of Rs. 2, 40,000 i.e. for the year 1987, 1988 and 1989 before making any payment of dividend to equity shareholders for the year 1989.
• Non-cumulative – The dividend is not paid in case of no profits in a particular year and arrear cannot be claimed in the subsequent years. In the case of non-cumulative preference shares, the dividend is only payable out of the net profits of each year. If there are no profits in any year, the arrears of dividend cannot be claimed in the subsequent years. If the dividend on the preference shares is not paid by the company during a particular year, it lapses. Preference shares are presumed to be cumulative unless expressly described as non-cumulative.
• Participating Preference Shares – The holders of these shares are first paid the fixed rate of dividend and then the equity share holders are paid a reasonable rate of dividend. The mode for dividing surplus profits between preference and equity shareholders is given in the Articles of Association. Participating preference shares are those shares which are entitled in addition to preference dividend at a fixed rate, to participate in the balance of profits with equity shareholders after they get a fixed rate of dividend on their shares. The participating preference shares may also have the right to share in the surplus assets of the company on its winding up. Such a right may be expressly provided in the memorandum or articles of association of the company.
• Non-participating Preference Shares – The preference shares which are paid a fixed rate with no additional right in the surplus profits are called non-participating preference shares. Non- participating preference shares are entitled only to a fixed rate of dividend and do not share in the surplus profits. The preference shares are presumed to be non-participating, unless expressly provided in the memorandum or the articles or the terms of issue.
• Convertible Preference Shares – The holders of this kind of preference shares are given a right to convert their holdings into equity shares after a specific period. Convertible preference shares are those shares which can be converted into equity shares within a certain period.
• Non-Convertible Preference shares – These are the preference shares which cannot be converted into equity shares. These are those shares which do not carry the right of conversion into equity shares.
• Redeemable preference shares – A company limited by shares, may if so authorized by its articles issue preference shares which are redeemable as per the provisions laid down in Section 80. Shares may be redeemed either after a fixed period or earlier at the option of the company.
• Guaranteed preference shares – These shares carry the right of a fixed dividend even if the company makes no or insufficient profits.