Preference Shares: Section 85 of the Company Act, 1956 defines
Preference Shares to be featured by the following rights:
• Preference Shares entitle its holder the right to receive dividend at a fixed rate or fixed amount.
• Preference Shares entitle its holder the preferential right to receive repayment of capital invested by them before their equity counterparts at the time of winding up of the company.
Types of Preference Shares:
1. Cumulative Preference Shares: When a preference shareholder has a right to recover any arrears of dividend, before any dividend is paid to the equity shareholders, then the type of Preference Shares held by the shareholder is known as Cumulative Preference Shares.
2. Non-Cumulative Preference Share: When a preference shareholder receives dividend only in case of profit and is not entitled any right to recover the arrears of dividend, then the type of Preference Shares held by the shareholder is known as Non-Cumulative Preference Shares.
3. Participating Preference Share: When a preference shareholder enjoys the right to participate in the surplus profit (in addition to the fixed rate of dividend) that is left after the payment of dividend to the equity shareholders, the type of shares held by the shareholder is known as Participating Preference Share.
4. Non-participating Preference Share: When a preference shareholder receives only a fixed rate of dividend every year and do not enjoy the additional participation in the surplus profit, then the type of shares held by the shareholder is known as Non-Participating Preference Shares.
5. Redeemable preference share: When a preference shareholder is repaid by the company after a certain specified period in accordance with the term specified in the Section 80 of Company Act of 1956, then the type of the shares held by him/her is known as Redeemable Preference Shares.
6. Non-Redeemable Preference share: These shares are not repaid by the company during its lifetime. As per the Section 80A of the Company Act of 1956, no company can issue Non-Redeemable Preference Shares. It is merely a theoretical concept.
7. Convertible Preference Share: The shareholders holding Convertible Preference Shares have a right to convert his/her shares into equity shares.
8. Non-Convertible Preference Share: Unlike Convertible Preference Shares, the shareholders holding Non-Convertible Preference Shares do not enjoy the right to convert their shares into equity shares.
