Financing of Business: Preference Shares and Types of Preference Shares (For CBSE, ICSE, IAS, NET, NRA 2022)

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Preference Shares

Preference Shares are those shares, which carry preferential rights in respect of dividend and return of capital. Before any dividend is paid to the equity shares, the dividend at a fixed rate must be paid on the preference shares. However, this dividend is payable only if there are profits. Again, at the time of winding up, the holder of the preference shares will get the return of their capital before anything is paid to the equity shareholders. The holders of the preference shares do not have any voting right. So, they cannot take part in the management of the company. It is not compulsory on the part of the company to issue preference shares.

Types of Preference Share

A company has the option to issue different types of preference share. Let us see what the different types of preference are share a company can issue.

Convertible and Non-Convertible Preference Share

The preference shares which can be converted into equity shares after a specified

Types of Preference Share

period of time is known as convertible preference share. Otherwise, it is known as non-convertible preference share.

Cumulative and Non-Cumulative Preference Share

In cumulative preference shares, the unpaid dividends are accumulated and carried forward for payment in future years. On the other hand, in non-cumulative preference share, the dividend is not accumulated if it is not paid out of the current year՚s profit.

Participating and Non-Participating Preference Share

Participating preference shares have a right to share the profit after making payment to the equity shares. The non-participating preference shares do not enjoy such a right.

Redeemable and Irredeemable Preference Share

Preference shares having a fixed date of maturity is called as redeemable preference share. Here, the company undertakes to return the amount to the preference shareholders immediately after the expiry of a fixed period. Where the amount of the preference shares is refunded only at the time of liquidation, are known an irredeemable preference share.

Difference between Equity Shares and Preference Shares

We have already learnt the meaning and features of equity and preference shares. Now let us find out the differences between these two.

Image of Difference between Equity Shares and Preference Shares
Basis of differenceEquity sharesPreference Shares
ChoiceIt is compulsory to issue these shares.It is not compulsory to issue these shares.
Payment of dividendDividend is paid on these shares only after paying dividend on preference shares.Dividend is paid on these shares in preference to the equity shares.
Return of capitalIn case of winding up of the company the equity share capital is refunded only after the refund of preference share capital.In case of winding up of the company the capital is refunded in preference over the equity shares.
Voting RightThe equity shareholders enjoy voting rights.The preference shareholders do not have voting rights.
Accumulation of DividendThe dividends on equity shares are not accumulated and therefore cannot be carried forward.The unpaid dividends are accumulated and are carried forward to the future years in case of cumulative preference shares.

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