Explain Different Types of Preference Shares

In our earlier article we discussed about the preference shares meaning,characteristics of preference shares and merits and demerits of preference shares. In this article we will discuss and understand about the different types of Preference Shares

Types of Preference Shares

§  Cumulative Preference Shares

§  Non-Cumulative Preference Shares

§  Redeemable Preference Shares

§  Irredeemable Preference Shares

§  Participating Preference Shares

§  Non-Participating Preference Shares

§  Convertible Preference Shares

§  Non-Convertible Preference Shares

Now let us try to understand each of the different types of preference shares in detail.

§  Cumulative Preference Shares :

Cumulative Preference Shareholders have a right to receive the dividends that were not paid earlier (arrears) before equity shareholders dividend is paid out. Let understand with an example, For instance dividend not paid for last four years but the company decided to pay to ESH this year but before the payment is made to ESH the company has to clear the Cumulative Preference Shareholders’ dividends of four years and then it has to pay for the ESHs.

§  Non-Cumulative Preference Shares :

Non-Cumulative Preference Shareholders don’t have the right to get paid for the previous years in which dividend is not paid rather dividend will only be paid before equity shareholders in the year in which equity shareholders are promised to pay the dividend. Let’s try to understand using an example, For instance the company hasn’t paid dividend in between 2017-2019 but has decided to pay the dividend of 2019-2020 in 2020 in this case Non-cumulative preference shareholders don’t have the right to claim for the dividend that is not paid during 2017-2019 but the company has to pay non-cumulative PSH dividend before dividend is paid out to the ESH.

§  Redeemable Preference Shares :

Redeemable Preference Shares refers to the preference shares that are to be paid out in the life of the company subjected to the Terms & Condition of issue and the fulfillment of legal obligations.

§  Irredeemable Preference Shares :

Irredeemable Preference Shares  refers to the preference shares that are to be paid out when the company or business is to be winded up or shut down.

§  Participating Preference Shares :

Participating Preference Shares are the preference Shares that give that PSH the right not only to the fixed rate of dividend but also share in the surplus profits which are remaining after the ESHs are dividend is paid out. The surplus profit will be shared between participating preference shareholders and equity shareholders on an agreed ratio.

§  Non-Participating Preference Shares :

Non-participating preference shares are only have the right over the fixed rate of dividend and does not have any right over the surplus left over.

§  Convertible Preference Shares :

Convertible Preference Shares are the preference shares that have the right to get converted as equity shares. These preference shares will get converted into equity shares after they mature.

§  Non-Convertible Preference Shares :

Non-Convertible Preference Shares are the preference shares that have no right or to get converted in equity shares. These preference shares will remain preference shares throughout the life of company or business.