Preference shares entitle to receive dividend at a fixed rate. Importantly, this dividend had to be paid before dividend can be paid to equity shareholders. In the event of liquidation of the company, your claim to the company’s surplus will be higher than that of the equity holders, but however, below the claims of the company’s creditors, bondholders / debenture holders.
Types of Preference Shares
(a)Participating and non – participating: Participating preference share are those shares which are entitled to a fixed preferential dividend and in addition they carry a right to participate in the surplus profit along with equity shareholders after dividend at the certain rate has been paid to equity shareholders. In the event of winding up, if after paying up back both the preference and the equity shareholders there is still any surplus left then the participating preference shareholders get additional share in the surplus assets of the company. Otherwise preference shareholders get only the fixed preferential dividend and nothing more. The right to participate may be given either in the memorandum or articles or by the virtue of their term of issue.
(b)Convertible and Non-convertible preference shares:
When preference shareholders could covert their holding into ordinary shares, within a specified period of time then it is called as convertible preference shares. The holders of non-convertible preference shares have no such right of conversion.
(c)Cumulative and Non Cumulative Shares: A cumulative preference share confers right on its holder to claim fixed dividend of the past and the current years and out of future profits.
The non cumulative preference share gives right to its holders to a fixed amount or a fixed percentage of dividends out of the profits of each year. Preference share are cumulative unless expressly stated to be non cumulative. Dividend on preference share, like equity shares, can be paid only out of profits.
(d)Redeemable and Irredeemable Preference Shares: Redeemable preference shares can be redeemed on or after a period fixed for redemption under the terms of issue or after giving a proper notice of redemption to preference shareholders. The companies Act, however, impose certain restrictions for the redemption of preference shares. Irredeemable preference shares are those shares which cannot be redeemed during the lifetime of the company.