Types of Preference
a. Cumulative Preference Shares
o A cumulative preference share is one that carries
the right to a fixed amount of dividend every year. If current year profit is
insufficient, it is paid from future profit. So dividend is accumulated unless
it is paid in full and such shares are called Cumulative Preference Share.
o The arrears of dividend are shown
in balance Sheet as ‘Contingent Liabilities’.
o In India ‘Preference shares’ are
always cumulative unless otherwise stated.
o If dividends are in arrears for a
period not less than two year, holders of such shares will be entitled to take
part and vote on every resolution in general body meeting of shareholders.
b. Non-Cumulative Preference Shares
o These are those shares which do
not carry right to get divided accumulated or carry forward if profit of
current year are insufficient. In other words we can say if company cannot pay
dividend in one year then right of shareholder to receive dividend in future
o If dividend remains arrears for a
period not less than two years or an aggregate periods of not less than three
years comprised in six years ending with the expiring of financial year, holder
of such shares will be entitled to take part and vote on every resolution at
any meeting of shareholders.
c. Participating Preference shares :--These shareholders have
o Right to get fixed percentage of
o Right to participate on stipulated
profit after equity shareholders have been paid at stipulated rate.
o In case of winding up of company,
these shareholder also get right to receive pre-determined portion of surplus
after equity shareholders have been paid off.
d. Non participating preference Share:-
These shareholders only get fixed percentage of dividend every year. They don’t
have right to participate in profit and surplus in case of winding-up of
e. Redeemable Preference Shares.:
These are shares that company may issue on the condition that company will
repay after the fixed period or even earlier at company discretion. It is
governed by section 55 of the companies Act 2013.
f. Non-Redeemable Preference shares:-
Those shares which are not redeemable are called non redeemable preference
shares. According to section 55, no company limited by shares shall issue
irredeemable preference share or preference shares redeemable after expiry of
20 years from the date of issue.
g. Convertible Preference Shares:-
These shareholder have right to convert their shares into equity shares at
their option according to terms and conditions of their issue.
h. Non-Convertible preference Shares :These
shareholders do not have right to convert their shares into equity shares.
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