PREFERENCE SHARES - Accounts and Finance for Managers

These type of shares are annexed with preferential rights over the equity shares in sharing the benefits organization at the moment of declaration. It is nothing but the combination of both equity shares and debentures; why ? It has some features of equity shares and debenture through redemption. The dividends are normally paid only to the tune of fixed rat which was agreed only at the moment of issue in between the issuing company and investors. The dividends are normally declared by them only subject to the availability of profits.

Preference Shares as a source of Finance

Type of Preference Shares: The following are the various type of preference shares which the company normally issues:

Cumulative Preference Shares

The unpaid preference dividends are paid before anything paid to equity shareholders. The unpaid preference dividends are called in other words as Arrearages. The arrearages should not go beyond three years. The arrearages never carry any interest rate. If any provision is available in the Articles of Association, the arrearages are paid to preference shareholders at the moment of liquidation.

Non Cumulative Preference Shares

The dividends are paid subject to the availability of profits. If the availability of profits are not sufficient for the declaration of preference dividend, which do not bear any right to receive. Due to non declaration of dividends during the previous years, these types of shareholders are not entitled to share in the surplus benefits of the company, but they are having the right to receive the dividend prior to the equity shareholders in any particular year.

No Rights to Share in the Surplus Profits

  • Right to receive the dividend prior to the equity shareholders in any particular year. The repayment of share capital normally takes place only at the moment of winding of the companies.
  • Convertible preference shares: These types of shares are issued by the company along with the right of conversion to convert the holding into equity shares at the specified period. Normally, during the process of conversion, the companies charge higher premium from the shareholders. The voting powers, bonus issue, higher dividends and so on are subject to the availability of rights out of the conversion.
  • Redeemable preference shares: Under this category, the amount of raised capital is subject to redemption/repayment, which means that when any preference shares are revealing the definite time period of repayment is known as redeemable preference shares.
  • Non redeemable preference shares: These types of preference share never carry any definite period of repayment but at the moment of winding up the repayment is made immediately after the creditors.
  • Participating preference shares: The type of preference shares facilitates the holders to share the surplus benefits immediately after declaring the dividend benefits to preference shareholders and equity shareholders.
  • Non Participating preference shares: Except the earlier, all are nothing but non participating preference shares in category.

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