Preference shares are a class of shares which are entitled to the holder on the basis of a fixed dividend payment. There is a rule that the payment of the preference share dividends takes priority over ordinary share dividends.
As per the Companies Act, 2013, any Private Limited Company or a limited company has the rights to issue preference shares if authorised by the articles of association of the enterprise.
All the preference shares which have been issued by a company in India are redeemable and should be redeemed within 20 years of its issuance.
Here is a brief on the various kinds of preference shares and the process of issuing preference shares in a private limited company in India.
To fulfil the eligibility of a preference share, that particular share must necessarily fulfil the following conditions as listed in the Companies Act, 2013:
Preference shares can be classified into following categories based on the rights:
The cumulative preference shareholders are entitled to get the dividend for a year where the dividends could not be paid due to the losses or inadequate profit in the subsequent year’s whenever there are sufficient profits.
The non-cumulative shareholders are not entitled to receive the dividend for a year where the dividends could not be paid in the subsequent years.
Therefore in case of the non-cumulative preference share, the rights to the dividend for a year cannot be carried over in the following year(s)
There are certain participating preference shares which are eligible for receiving some surplus profit or dividends in the company, in addition to being entitled to some fixed dividends as well.
The non-participating shares are the ones which are not supposed to participate in the surplus profits of the company. The non-participating preference shares are only entitled to the fixed dividend payments.
The redeemable preference share can be redeemed by the company within 20 years from the date of issue.
The irredeemable preference shares are those shares which would not be redeemed by a company. The Companies in India are not allowed to issue irredeemable preference shares.
The convertible preference shares are those which can be converted into equity shares of the company as mentioned in the terms and conditions of their issue.
The non-convertible preference shares are not convertible into equity shares of the company, but they retain their preferential value to the payment of capital when in case of winding up of the concerned company.
A Private Limited Company or a Limited Company which have share capital have the right of issuing preference shares if authorised by the Articles of Association of the company, subject to following conditions:
In addition to the above clauses, the company which is issuing preference shares must necessarily set out in the Articles of Association of the company by following the below regulations: