— Kishore V, SME and ACW at Edumarz
The term “preference share” refers to a stock that has the following two rights:
I) They are entitled to a fixed-rate dividend before any dividend on the equity shares is paid.
(ii) They have the right to refund funds before equity shares are restored when the firm is wound up.
Regardless of the above two qualifications, a holder of a preference share may have a right to partake in the company’s excess in full or in part, as stipulated in the Memorandum or Articles of Association.
Preference shares come in a variety of shapes and sizes, including the following:
- I) Cumulative Preference Shares:
- A preference share is said to be cumulative if there are no profits in one year and the arrears of dividends are to be carried forward and paid out of the earnings of the following years.
- It should be highlighted that the corporation should only pay dividends from earnings
(ii) Non-Cumulative Preference Shares:
- A non-cumulative preference share is one that has not yet been given a dividend.
- The type of preference shares owned by the shareholder is known as non-cumulative preference shares when a preference shareholder receives dividends only in the event of profit and has no right to recoup dividend arrears.
(iii) Redeemable Preference Shares:
- Redeemable preference shares are shares that are reimbursed after a set period of time in line with the terms of issuance.
(iv) Non-Redeemable Preference Shares:
- These are preference shares that do not have a redemption agreement attached to them.
- No corporation limited by shares may issue irredeemable preference shares or preference shares that can be redeemed after 20 years from the date of issuance.
(v) Participating Preference Shares:
- Participating preference shares are the type of shares held by a preference shareholder who has the right to partake in the excess profit (in addition to the specified rate of dividend) that remains after the payment of dividend to equity owners.
(vi) Non-Participating Preference Shares:
- Non-participating preference shares are those in which a preference shareholder receives just a predetermined rate of dividend every year and does not receive any further involvement in the excess earnings.
(vii) Convertible Preference Shares:
- These shares allow the holder to convert them into equity shares at their discretion, subject to the terms and circumstances of the issue.
(viii) Non-Convertible Preference Shares:
- Non-convertible preference shares are those in which the holder of a preference share does not have the ability to convert his holding into an equity share.
- Unless otherwise noted, preference shares are non-convertible.