PREFERENCE SHARES

Introduction:                The share capital of the company is undoubtedly the ideal method for the procurement of fixed capital because it has not to be paid back to te shareholders within the lifetime of the company.  The only exception is the redeemable preference shares.  A public limited company can issue only two types of shares namely preference shares and equity shares.

Preference Shares:        The preference shares are the shares which carry preferential right with regard to both (i) payment of dividend at a fixed amount or at a fixed rate and (ii) repayment of capital on winding up of the company.  The preference shareholders are entitled to a fixed of dividend fixed by the Article of Company and they receive dividend before the dividend on equity shares is paid.  Preference shareholders get regular and stable dividend.  Hence, Banks, Life Insurance Companies, Investment Trusts invest their money into preference shares of companies.  Preference shares may be cumulative, non-cumulative, participating or redeemable.

1. Cumulative Preference Shares: If during any year the company has not made sufficient profits to distribute the dividend on preference shares the arrears of dividends for such years are paid when the company makes profits in subsequent years.  The arrears of dividend of preference shares are paid off before paying any dividend on other kinds of shares.  Preference Shares are generally cumulative and it is expressly stated in the Memorandum of Articles and in the Prospectus of the company.  Generally, these shares also carry preference as to the repayment of capital in winding up of the company.
2. Non-cumulative preference Shares: If during any year there are no profits available for dividend the preference shareholders gets no dividend during that year.  They cannot even claim for arrears of dividend out of the profits of any subsequent year.  Hence, they are called non-cumulative preference shares.  These shares are on the equal footing with other classes of shares in the event of winding up the company.
3. Redeemable Preference Shares: A company limited by shares, if so authorized by its Articles may issue Preference Shares which are to be redeemed or repaid after a certain fixed period.  The redeemable preference shares are repaid or redeemed out of profits of the company or by the issue of new shares.  When the company decides to redeem the Preference shares out of the profits of the company it must create a "Capital Redemption Reserve Fund" and every a certain amount of profits should be transferred to this fund so that at the end of the redemption period, a sufficient amount equal to the amount of Redeemable Preference shares must be issued as fully paid up shares.  Such a reduction of share capital, any redemption of redeemable preference shares should be notified to the Registrar within 1 month of redemption.