What are Preference Shares? Explain its types in detail.

Answer: Preference shares are shares that carry preferential rights over equity shares for payment of dividend at a fixed rate and for repayment of capital on winding up.

Meaning: As per Section 43 of the Companies Act, 2013, preference share capital is that part of the share capital which carries (a) a preferential right to dividend at a fixed amount or rate, and (b) a preferential right to repayment of capital on winding up, before equity shareholders. Preference shareholders generally have voting rights only on resolutions directly affecting their rights, or if their dividend remains unpaid for two years or more. Under Section 55, a company cannot issue irredeemable preference shares.

Types of preference shares:

1. Cumulative preference shares: if dividend is not paid in any year because of inadequate profits, the arrears accumulate and are paid in later years before any dividend is paid to equity shareholders.
2. Non-cumulative preference shares: dividend not paid in a year lapses; the holders cannot claim arrears in later years.
3. Participating preference shares: besides the fixed dividend, they share in the surplus profits remaining after equity shareholders have been paid, and/or in surplus assets on winding up, as provided in the Articles.
4. Non-participating preference shares: they get only the fixed rate of dividend and no share in surplus profits or assets. Preference shares are non-participating unless stated otherwise.
5. Convertible preference shares: they can be converted into equity shares, fully or partly, after a specified period on the terms of issue.
6. Non-convertible preference shares: they cannot be converted into equity shares and remain preference shares until redemption.
7. Redeemable preference shares: the company repays their amount after a fixed period, which cannot exceed 20 years (30 years for infrastructure projects, with annual redemption of at least 10% from the 21st year). They can be redeemed only if fully paid, and out of profits or the proceeds of a fresh issue; a Capital Redemption Reserve must be created when redeemed out of profits.
8. Irredeemable preference shares: repayable only on winding up. Under the Companies Act, 2013 a company cannot issue such shares.

Preference shares therefore suit investors who want a fixed and safe return with low risk, while the company gets owned capital without diluting control.