What are preference shares is the biggest question in the stock markets. As well as regarding the company. specially for those who are beginers in this industry.
What are preference shares
Preference shares are also called “Preffered shares”. They are the those shares which carry certain preferential rights- with regards to both The Dividend and The Return of capital.
For Instance- When the corporation declares a Dividends, Preference shareholders receive Divident payments before common shareholders.
Preference shares have Two rights:-
First – Divident At a fixed rate must be paid on preference shares (before any dividend is paid on other shares).
Secondly – In the event of winding up of the company or Liquidation of the company. Preference shareholders must be paid back tjeir capital before any other class or types of shareholders.
Generally- Preference shares do not carry any voting rights except when dividend is outstanding for more than two years (three years in case of non- cumulative preference shares).
There are four types of preference shares are the following:-
1.Cumulative and Non-Cumulative Prefrence shares
In the case of cumulative preference shares dividend not paid in a particular years are carried forward to the next year. such unpaid dividends go on accumulating and become payable out of the profits in subsequent years. such arrears of divdend must be paid before dividend is paid on any other class of shares. Unless otherwise stated preference shares are cumulative
Non-cumulative Preference shares dividends do not accumulate. In case the compony does not declare dividends in any year, the right to dividend in respect of that year is lost for ever. The dividend claim is not carried to subsequent year.
IN SHORT “cumulative prefrence shares are those shares in which all dividend have to be paid, even the ones that were skipped. And, the non-cumulative are the type that does not include the skipped dividends”.
2. Participating and non-participating preference shares
Participating shares give the holder the rights to share in the profits left after the payment of dividend to preference and equity shareholders. On the contrary, the holders of non participating preference shares do not enjoy the right to share in the surplus profits. They get only the fixed dividend.
3. Convertible and non convertible preference shares.
Holders of convertible preference shares can get such shares converted into equity shares after a fixed period. on the other hand, shares which cannot be converted into equity shares are known as non-convertible preference shares.
4. Redeemable and Non-redeemable preference shares.
The holder of redeemable preference shares can be refunded their capital after the expiry of a specified period or at the discretion of the company. only a company limited by shares can issue redeemable prefernce shares. The intention to return money should be made clear when the shares are isuued. The Company Act lays down several condition for the redemption of preference shares.
Non-redeemable preference shares cannot be redeemed before the winding of company. However, the companies Amendment Act, 1996 lays down that preference shares can not be issued for a period of more than twenty years.