The share capitals of a company are of two types namely Equity Shares and Preference Shares.
Equity shares are non-refundable to shareholders during the lifetime of the company. Unlike preference shares, there will be no fixed rate of dividend to be paid to the equity shareholders and this rate may vary from year to year. Shareholders sometimes get more than the fixed amount of dividend payable to preference shareholders or may not get any dividend if the company does not make a profit.
Preference shares are shares of a company’s stock with a fixed amount of dividends that are paid out before equity share dividends are issued. The shareholders of this type have a preferential right to the return of capital before equity shareholders in case the Company goes into liquidation. A company cannot issue any preference shares after the expiry of a period of 10 years from the date of its issue.
There are different types of preference shares
- Cumulative Preference Shares:
The cumulative preferential shareholders have preferential rights to dividends at a fixed rate. The dividend payable on these shares goes on accumulating (cumulative) until it is fully paid off. If dividends at the fixed rate cannot be paid in any year due to inadequate profits, arrears of dividends will accumulate and the same will have to be paid out of profits of future years. In the other words, if dividends at the fixed rate could not be paid during a particular year due to inadequate profits, arrears of dividends will accumulate and the company will have to pay the arrears from profits of future years.
- Non-Cumulative Preference Shares:
The cumulative preferential shareholders have preferential rights to dividends at a fixed rate. Unlike cumulative preference shares, but they get dividends only if there is any profit available for distribution in that year. The short-fall in fixed dividend payable in a particular year will not be carried over to the subsequent year. That is, if the dividend is not paid, it cannot be carried forward.
- Participating Preference Shares:
The holders of participating preference shares are not only entitled to a fixed rate of dividend, but also to a share in the surplus profits which remain after the claims of the equity shareholders. However, this type of right to preference shareholders should be expressly provided in the Article of Association of the company.
- Non-Participating Preference Shares:
The holders of Non-Participating Preference Shares are entitled only for a fixed amount of dividends and not eligible to receive any amount from the surplus profit. When not expressly provided either in the memorandum of association or article of association of the company, in relation to the issue of these shares, all preferential shares are deemed as non-participating preference shares.
- Convertible Preference Shares:
The holders of Convertible Preference Shares have a right to get their preference shares converted into equity shares after a predetermined time span or on a specific date.
- Non-Convertible Preference Shares:
The Non-Convertible Preference Shares cannot be converted into equity shares. However, it will perpetually fetch the interest rate as promised on face value
- Redeemable Preference Shares:
Generally, the amount invested in the equity shares of a company is not redeemable except when the company goes into liquidation or in certain cases where the company buys back the shares issued by it to the public. However, if there is a provision in the article of association to issue redeemable preference share and in terms of the above provisions, a company may issue redeemable preferential shares. Such shares are issued for a fixed term, and they are paid off after the expiry of the term.