Meaning: -Preference shares are those shares which enjoys preference over equity share capital. The two main preference shares are:

  1. Fixed annual dividends
  2. Return of capital in the event of winding up of the company.

Although, the preference shareholders enjoy the above preferences, they do not enjoy normal voting rights. They are entitled to vote only on those matters that affect their interests. The maximum rate of dividend permissible is 14 per cent per year.

Generally shares are divided into two types

1.   Equity shares.

2.   Preference Shares.

Following are some of the different types of preference shares:

1.      Cumulative preference shares:-Cumulative preference shares are those who can exercise Right of Accumulation (addition). It means, they can claim stipulated dividend for the past and current year. In other words when company fails to pay dividend to them in a particular year then the unpaid amount is carried forward as arrears (debt for the company) and paid in the next year.

2.      Non Cumulative preference shares: -Whereas Non-cumulative preference shares cannot claim arrears of dividend. They have right to get the dividend only out of current year’s profits. If company fails to pay dividend in a particular year, it lapses (slip).

3.      Redeemable preference shares:-The redeemable preference shares are payable after the expiry of a certain period however, according to sec 80 of companies Act, such an issue must be authorized by Articles of Association. Only fully paid shares can be redeemed.

4.      Irredeemable preference shares: - The irredeemable preference shares are payable only on the winding up of the company. The irredeemable shares carry more risk, because there are chances they may not get their capital back on the winding up of the company. Therefore as per the latest amendment Act 1996, a company cannot issue irredeemable preference shares or even the shares which are shares which are redeemable after twenty years.

5.      Participating preference shares;-The participating preference shares have the right to participate in the surplus profits of the company,

6.      Non-participating preference shares : -whereas, non-participate preference shares do not carry such right. They are only entitled to the fixed dividend and do not share surplus profits of the company or surplus assets at the time of winding up.

7.      Convertible preference shares; - The convertible preference shares can be converted into equity shares.

8.      Non-convertible preference shares: - while non-convertible preference shares cannot be converted into equity shares. In this respect, convertible preference shares are more preferable, especially, of highly profitable companies.