12.6.5 (Preference share)

A preference share is one which carries the following two rights over holders of equity shares: (i) a preferential right in respect of dividends at a fixed amount or at a fixed rate and (ii) a preferential right in regard to repayment of capital on winding up.

The preference or priority of the preference shareholders is in relation to the rights of equity shareholders [s.85].

Participating and non-participating. If a preference share carries either one or both of  the following rights then it is known as participating share: (i) to Participate further in the profits either along with, or after payment of a certain rate of dividends on equity shares, (ii) to participate in the surplus assets at the time of winding up [s.85]. Thus, if a preference share does not carry either of thes rights, then it will be known as non-participating share. It should be remembered that preference shares are always presumed to be non-participating unless expressly described as participating.

Cumulative and non-cumulative. lf a preference share carries the right for payment of arrears in dividend from future profits, then such a share is known as cumulative preference share. Thus, dividends not paid in any year or years-accumulate and are paid out whenever profits are available. If a preference share does not carry the right to dividend in arrears, then such a preference share is known as non- cumulative or simple. Thus, if no profits  are available in a year' the holders get nothing nor can they claim unpaid dividend in subsequent years. Its hould be remembered that preference shares are always presumed to be cumulative unless expressly described as non cumulative.

Redeemable and irredeemable. A preference share which can be redeemed upon the resolution of the Board of Directors, if the articles so provide, is known as redeemable preference share (s.80). A company can issue redeemable preference shares if it complies with the following requirements:

            (i) such shares are to be issued as redeemable preference shares; shares issued earlier cannot be converted into redeemable preference;

            (ii) there must be authority in the articles to issue redeemable preference shares;

            (iii) the shares can be redeemed only when they are fully paid up;

            (iv) the shares may only be redeemed: (a) out of profits of the company which would otherwise be available for dividend, or (b) out of the proceeds of a new issue of shares - not necessarily of redeemable preference shares made for the Purpose of redemption;

            (v) if there is a premium payable on redemption, it must have been provided out of profits or. out of the share premium account before the shares are redeemed;

            (vi) where the shares are redeemed out of profits, a sum equal to the nominal amount of the shares redeemed is to be transferred out of profits to the "Capital Redemption Reserve Account.

The redeemable preference shares can be redeemed by the company either at a fixed date, or after a certain period of time, or at the option of the company. But redemption of such shares shall not be taken as reducing the nominal capital of the company [s.80 (3)].

The Companies (Amendment) Act, 1999 has amended s. 80 to the effect that for the words "share premium account", the words "security premium account’ shall be substituted.

Irredeemable preference shares. No company limited by shares can issue any preference shares which are irredeemable or are redeemable after the expiry of ten years from the date of issue. Also, once the company has redeemed the shares, or it is about to redeem them, it may issue new shares upto the same nominal amount and it will be presumed that the preference shares were never redeemed. In such a situation of the company's capital is not deemed to be increased and, therefore, no stamp duty is to be paid. This privilege is available only if the redemption takes place within one month after the making of the fresh issue [s.80 (4)].

Non-compliance with the provisions of s.80 will render the company and every officer of the company who is in default liable to a fine upto Rs 10,000.

Voting rights of preference shareholders. The preference shareholders will vote only

on matters directly relating to preference shares. Section 87 (2) mentions the following matters which relate to preference shares and preference shareholders can vote on them: (i) any resolution for winding up of the company; (ii) any resolution for the reduction or repayment of share capital; (iii) any resolution at any meeting, if dividend on cumulative preference shares remains unpaid for at least two years. Holders of non-cumulative preference shares shall have a right to vote on all resolutions, if their dividends are in arrear for the two financial years period of six years ending with the financial year preceding the meeting. [s.87(2)].