Preference Shares Preference shares are those which carry A preferential right as to the payment of dividend during the lifetime of the company A preferential right as to the return of capital when the company is wound up These shares carry a right of dividend at a fixed rate before any dividend can be paid on equity shares. The fixed rate of dividend payable is declared at the time of the issue of such shares
Kinds of Preference share Cumulative or non- cumulative Redeemable or irredeemable Participating or non- participating Convertible or non- convertible
Cumulative vs. Non- cumulative The holder of cumulative preference shares are entitled to recover the arrears of preference dividend before any dividend is paid on equity shares. Example, if dividend has not been paid for the accounting years 2007-08 and 2008-09 on 10% cumulative preference shares and the company wants to distribute dividend on equity shares for the year 2009-10, then dividend on preference shares for 3 years viz., 07-08, 08-09 and 09-10 10% p.a. i.e. 30% dividend in all will be paid first on preference shares before any dividend can be paid on equity shares for 09-10.
Cont….. In case of non- cumulative preference shares, arrears of dividend do not accumulate and hence, if dividend is to be paid on equity shareholders in any year, dividend at the fixed rate for only one year will have to be paid to preference shareholders before equity dividend is paid. Note :- Unless specifically mentioned otherwise, preference shares should be considered to be cumulative.
Redeemable vs. Irredeemable Redeemable preference shares are those preference shares whose amount can be returned by the company to their holder within the life time of the company subject to the terms of the issue and the fulfillment of certain legal conditions laid down in Sec. 80 of the companies act. The amount of irredeemable preference shares can be returned only when the company is wound up.
Participating vs. Non- participating Participating preference shares are entitled not only to fixed rate of dividend but also to a share in surplus profits which remain after dividend has been paid at a certain rate to equity shareholders. The surplus profits are distributed in a certain agreed ratio between the participating preference shareholder and equity shareholder. Non- participating preference shares are entitled to only the fixed rate of dividend.
Convertible vs. Non- convertible The holder of convertible preference shares enjoy the right to get the preference shares converted into equity shares according to the terms of issue. The holder of non- convertible preference share do not enjoy this right.