Issuing Preference Shares

Preference shares allow an investor to own a stake at the issuing company with a condition that whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid.

In other words, when it comes to the payment of share dividends, the precedence would be given to preference shares and then to the ordinary shares.


According to Companies Act 2013, the conditions set for issuing preference shares are as follows:-

  1. No company limited by shares shall, after the commencement of this act, issue any preference shares which are irredeemable.
  2. A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed:
  3. Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders.

Categories of preference shares


  • Cumulative preference shares
    The shares in which the arrears of dividend are collective and payment of such arrears are done before the payment of dividend to equity shareholders.
  • Non-cumulative preference shares
    Shares in which the payment of the dividend is made out of annual profits. In case of no profits in any year, the arrears of dividend cannot be declared in the succeeding years. Preference shares are assumed to be cumulative by default unless they are described as non-cumulative.
  • Participating preference shares
    Shares which contribute in the balance of profits with equity shareholders after they get a dividend at a fixed rate (in addition to preference dividend at a fixed rate).
  • Non-participating preference shares
    Shares which contribute in the balance of profits with equity shareholders after they get a dividend at a fixed rate (in addition to preference dividend at a fixed rate).
  • Convertible preference shares
    They can be changed into equity shares within a limited time span or time limit.
  • Non-Convertible preference shares
    They do not hold the right of alteration into equity share.
  • Redeemable preference shares
    A company limited by shares, may, if so authorized by its articles issue redeemable preference shares according to the terms laid down in Section 80. Shares may be redeemed either after a set time span or earlier at the decision of the company.
  • Guaranteed preference shares
    These shares hold the right of a set dividend even if the company makes no or unsatisfactory proceeds.

Measures for Issuing Preference Shares under Section 62(1) (a) of the Companies Act, 2013

Issue of share can done three ways:

  • Right Issue of Shares (Section- 62(1) (a))
  • Privileged allocation of Shares (Section- 62(3) (c) and Section-42)
  • Classified assignment of Shares (Section-42)

Conditions for issuing preference shares

  • The Issue of Preference Shares has been approved in the general meeting of the company (by passing a resolution)
  • Company is required to maintain a register (register of member) under Section- 88. It shall have the details of such preference share holder(s)

Regulations before issuing preference shares

  • The precedence with respect to payment of dividend.
  • The contribution in the excess fund.
  • The involvement in additional assets and profit, on closing stages.
  • The disbursement of dividend on grounds of being cumulative or non cumulative.
  • The alteration of preference shares to equity shares.
  • The right to cast votes.
  • The redemption of preference shares

Click here for Online Company Registration

100% Online
No Hidden Charges
Track Your Order

Related Articles