Preference share capital is the form of capital that provides preference rights to the holder at the time of payment of dividend and at the time of winding up.
Preference shareholders are the holders of shares who get the preferential rights of dividend and at the time of winding up company over the equity shareholders. Any company can issue preference shares only if its articles of association authorize the company to do so. Every company is required to redeem its preference share within a time period of 20 years. Further, according to companies Act 2013 no company can issue preference shares which are irredeemable.
Conditions to be satisfied for issuing preference share capital-
Any form of company can issue preference share capital only by fulfilling certain conditions. These conditions which every company is required to fulfil are as follows-
- The article of association of company authorizes the issue of preference shares.
- The issuing of the preference shares by the concerned company has to be authorised by passing a resolution at a general meeting of the company.
- The concerned company while in the time of issuing preference shares should not have defaulted in the redemption of the preference shares being issued either before or after the commencement or in payment of dividend due on the preference shares.
Various kinds of preference shares that can be issued by the company are as follows-
- Redeemable Preference Shares- All the preference shares issued by the company are the redeemable preference shares. Thus every company except the infrastructure company is required to redeem these shares within 20 years from the date of issue.
- Irredeemable Preference Shares-The irredeemable preference shares are those shares which would not be redeemed by a company. However, the Companies in India are not allowed to issue irredeemable preference shares.
- Cumulative preference share- The holders of cumulative preference shareholders are entitled to obtain the dividend in the years in which they incurred profits for the year in which they were unable to receive dividend due to insufficient profits.
- Non-Cumulative Preference Shares- The non- cumulative preference shares are just the reverse of cumulative preference shares. The shareholders of non-cumulative shares are not entitled to receive the dividend for a year where the dividends could not be paid in the subsequent years. Thus, in case of the non-cumulative preference share, the rights to the dividend for a year cannot be carried over in the following year.
- Participating Preference Shares- The participating shareholders are holders that are entitled to receive some surplus profit or dividends in the company, in addition to being entitled to some fixed dividends as well.
- Non-participating Preference Shares- The non-participating shareholders are eligible to to get the fixed amount of dividend only and they are not supposed to participate in the surplus profits of the company.
- Convertible Preference Shares Preference shares that can be converted into equity shares are known as convertible preference shares. The terms and conditions for such issue id=s distinctly stated at the time of issue of such shares.
- Non-convertible Preference Shares-The non-convertible preference shares are not convertible into equity shares of the company, but they retain their preferential value to the payment of capital when in case of winding up of the concerned company.