Preference shares:– The law defines preference shares as those which have a preferential right:-

  • as to payment of dividend at a fixed rate during the lifetime of company; and
  • as to  return of capital on winding up of the company.

It may be remembered that preferential shareholders have no voting rights except in certain circumstances as defined by the law. Preference shares can be classified in following categories:-

  1. Cumulative preference shares:- In this case the arrears of  dividend are paid before paying the dividend to the equity shareholders. If the company goes into liquidation, arrears of dividends are not payable unless they are declared or any provision is kept in articles of association of the company.
  2. Non-cumulative preference shares:- where the arrears of dividend do not accumulate. If no dividend is paid during a particular period, it lapses.
  3. Participating preference shares:- They have the right of sharing the profit after dividend to all shareholders.
  4. Non-participating preference shares:- The do not have any right to share the surplus of profit after the payment of dividend equity shareholders.
  5. Convertible preference shares:- These shares can be converted in equity shares.
  6. Non-convertible preference shares:- These shares can not be converted into equity shares.

No company can issue the preference shares unless they are redeemable during the life time of the company. The maximum period of redemption is 10 years.

The numbers and amount of preference shares is shown in balance sheet under SHARE CAPITAL.