What are Preference Shares: Explained

Preface: This post was originally published in 2017 and has been updated on October 06, 2025, to provide you with the most current and accurate information.

Preference shares, also known as preferred stock, are a type of company shares. These shares grant certain privileges to the shareholders. In this blog post, we shall explain preference shares.

Preference Shares in Company Law

Preference shares are company shares that provide holders with certain priority rights. Holders of preference shares are called preference shareholders. When a company distributes dividends, preference shareholders receive payment first and only after them do other shareholders get paid. 

Similarly, if the company is liquidated, preference shareholders are repaid before other shareholders. Remember that a companyg can issue preference shares only if its articles of association authorize the company to do so. 

Every company must redeem its preferred shares within a maximum period of 20 years, except in the case of certain infrastructure projects. The Companies Act, 2013 clearly prohibits the issue of irredeemable preferred shares and requires their redemption within the prescribed timeframe.

Types of Preference Shares in Company Law

Various kinds of preference share that can be issued by the company are as follows:

1. Redeemable Preference Shares: These types of shares must be redeemed by the companies within 20 years from date of issue, except for infrastructure projects. 

2. Irredeemable Preference Share: They refer to those shares which would not be redeemed by a company. However, the Companies in India are not allowed to issue irredeemable preferred shares.

3. Cumulative Preference Share: Shareholders having these shares are entitled to receive any unpaid dividends from previous years before any dividends are paid to equity shareholders.

4. Non Cumulative Preference Share: They are just the reverse of cumulative preferred 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.

5. Participating Preferred Share: 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.

6. Non Participating Preferred Share: The non-participating shareholders are eligible to get the fixed amount of dividend only and they are not supposed to participate in the surplus profits of the company.

7. Convertible Preference Share: The preferred shares that can be converted into equity shares are called convertible preference/preferred shares. The terms and conditions for such an issue are distinctly stated at the time the shares are issued.

8. Non Convertible Preference Share: These 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.

Conditions to be Satisfied for Issuing Preference Stock

A company can issue preferred share only by fulfilling certain conditions:

• The article of association of the company must authorize the issue of such shares.

• The issuing of the preference stock 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 share should not have defaulted in the redemption of the preference share being issued either before or after the commencement or in payment of dividend due on the preference stock.

How Preference Shares are Issued: Process

The process of issuing shares, specifically the preferred share, takes place in the following manner:

Step 1: The Articles of Association must authorize the issue of preference share. Then, a board meeting must be called for the issue of shares by giving 7 days notice to all the directors.

Step 2: When the board meeting is conducted, approval must be given for the issue. Prepare a “Letter of Offer” that includes the right of renunciation in case of a rights issue. Also, issue a notice for the upcoming general meeting. The company secretary or an authorized director can send this notice.

Step 3: Then, conduct the general meeting and pass a special resolution approving the issuance of the shares.

Step 4: Form MGT-14 must be submitted with the Registrar of Companies before sending the Letter of Offer to any person (whether member or non-member).

Step 5: Then, the letter of offer must be circulated to the intended recipients. After that, collect responses regarding acceptance, renunciation or rejection of rights from the members to whom the offer was sent and also from persons in whose favour the right was renounced.

Step 6: Then, submission of Form GNL-2 must be done with ROC for the Letter of Offer, prospectus or private placement details.

Step 7: The board meeting must be scheduled for the share allotment.

Step 8: The board meeting must be held where the share allotment must be approved. Before the board, a list of allottees must be presented. Two directors and one more person must be authorized for signing the share certificates. A director must be authorized to file E-form PAS 3 (Return of Allotment) to ROC within 30 days from the allotment date.

Step 9: Make sure the filing of PAS 3 with ROC is done within a period of 30 days.

Step 10: Finally, the share certificate must be issued to the person to whom the share was allotted. 

Conclusion

Preference stock is a type of stock issued by companies to raise capital. Holders of this stock have priority over common stockholders when it comes to receiving the dividends. A company can issue preference stock only if it is authorized by its Articles of Association.

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Frequently Asked Questions (FAQs)

Q1. Who are preference shareholders?

A. Preference shareholders are those who hold shares that grant them preferential rights to receive dividends and repayment of capital during the company’s winding up, ahead of equity shareholders.

Q2. When can a company issue preference shares?

A. A company can issue preference stock/share when it is authorized by its Articles of Association and approved by a special resolution.

Q3. Why preference shares are issued?

A. Preference stock/share are issued by companies as a means to raise capital. These shares provide investors fixed dividend and also come with relatively lower risk. Preference shareholders also get priority over common shareholders when it comes to receiving dividends. Moreover, these shares enable companies to secure funds without adding to their debt obligations or giving up voting control linked to common equity.

Q4. Which Section of Companies Act defines issue and redemption of preference shares?

A. Section 55 of the Companies Act defines the issue and redemption of preferred shares.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.