The Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014 of India, categorize preference shares into several types. Here are some of the different kinds of preference shares, along with the relevant sections and rules:
Types of Preference Shares
- Cumulative Preference Shares (Section 43): If the company is unable to pay dividends in a particular year due to insufficient profits, the dividends of these shares are accumulated and paid out in the years when the company makes sufficient profits.
- Non-Cumulative Preference Shares (Section 43): Unlike cumulative preference shares, the dividends of non-cumulative preference shares do not accumulate. If the company does not declare dividends in a particular year, the right to receive dividends for that year lapses.
- Participating Preference Shares (Section 43): Participating preference shareholders not only receive a fixed preferential dividend but also participate in the surplus profits of the company, after dividends are paid to equity shareholders.
- Non-Participating Preference Shares (Section 43): These shareholders are entitled to a fixed amount of dividend and do not participate in the surplus profits of the company.
- Convertible Preference Shares (Rule 9 of Companies (Share Capital & Debentures) Rules, 2014): These shares can be converted into equity shares after a predetermined period.
- Non-Convertible Preference Shares (Rule 9 of Companies (Share Capital & Debentures) Rules, 2014): These shares cannot be converted into equity shares.
- Redeemable Preference Shares (Section 55): These shares can be redeemed or repurchased by the company after a certain period or on a particular date.
- Irredeemable Preference Shares (Section 55): These shares cannot be redeemed during the lifetime of the company. However, it’s important to note that the Companies Act, 2013 does not allow the issue of irredeemable preference shares. All preference shares issued are to be redeemable within a maximum period of 20 years.
Equity Shares vs Preference Shares
Under the Indian Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014, shares issued by a company can be classified mainly into two types: equity shares and preference shares. Here are some key distinctions between the two:
- Voting Rights: Equity shareholders have voting rights in the company. These rights can be exercised in major decisions, including the appointment or removal of directors.
- Dividends: The dividends for equity shareholders are not fixed and are declared from the profits of the company, only after dividends on preference shares are paid. Equity shareholders have a right to all the remaining profits after all other obligations are met.
- Return of Capital: In the case of winding up of the company, equity shareholders are the last to receive their share of capital.
- Conversion: Equity shares cannot be converted into preference shares.
- Voting Rights: Preference shareholders generally don’t have voting rights. However, they acquire voting rights if the company fails to pay dividends for a specified period of time.
- Dividends: Preference shareholders enjoy a preferential position when it comes to the payment of dividends. They receive a fixed rate of dividend before any dividend is paid to the equity shareholders.
- Return of Capital: In the case of winding up, preference shareholders are paid before equity shareholders.
- Conversion: Depending on the terms of issue, some types of preference shares can be converted into equity shares.
It’s important to note that the actual rights attached to preference and equity shares can vary based on the terms of the company’s articles of association and the specific terms of issue for the shares.
Wrapping it up
The rights and conditions attached to each type of preference share can vary depending on the terms of issue and the company’s articles of association. Always consult with a legal or financial advisor for specific advice.