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Preference Shares | Types Of Preference Shares | Prashant sir

Preference shares:

Preference shares share in a company that is owned by people who may receive part of the company's profits before the holders of ordinary shares are paid. They also may have their capital repaid if the company fails and has to close.

(i) Cumulative preference shares:

A preference share is said to be cumulative when the arrears of dividend are cumulative and such arrears are paid before paying any dividend to equity shareholders. Suppose a company has 10,000 8% preference shares of Rs. 100 each. The dividends for 1987 and 1988 have not been paid so far. The directors, before they can pay the dividend to equity shareholders for the year 1989, must pay the prefer. Dividends of Rs. 2, 40,000 i.e. for the year 1987, 1988 and 1989 before making any payment of dividend to equity shareholders for the year 1989.

(ii) Non-cumulative preference shares:

In the case of non-cumulative preference shares, the dividend is only payable out of the nett profits of each year. If there are no profits in any year, the arrears of dividend cannot be claimed in the subsequent years. If the dividend on the preference shares is not paid by the company during a particular year, it lapses. Preference shares are presumed to be cumulative unless expressly described as non-cumulative.

Preference Shares | Types Of Preference Shares | Prashant sir

(iii) Participating preference shares:

Participating preference shares are those shares which are entitled in addition to preference dividend at a fixed rate, to participate in the balance of profits with equity shareholders after they get a fixed rate of dividend on their shares. The participating preference shares may also have the right to share in the surplus assets of the company on its winding up. Such a right may be expressly provided in the memorandum or articles of association of the company.

(iv) Non-participating preference shares:

Non- participating preference shares are entitled only to a fixed rate of dividend and do not share in the surplus profits. The preference shares are presumed to be not participating unless expressly provided in the memorandum or the articles or the terms of issue.

(v) Convertible preference shares:

Convertible preference shares are those shares which can be converted into equity shares within a certain period.

(vi) Non-Convertible preference shares:

These are those shares which do not carry the right of conversion into equity shares.

(vii) Redeemable preference shares:

A company limited by shares, may if so authorized by its articles issue preference shares which are redeemable as per the provisions laid down in Section 80. Shares may be redeemed either after a fixed period or earlier at the option of the company.

(viii) Guaranteed preference shares:

These shares carry the right of a fixed dividend even if the company makes no or insufficient profits

Preference Shares | Types Of Preference Shares | Prashant sir

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