Page 125 - DCOM106_COMPANY_LAW

Company Law

Notes A public company and a private company which is a subsidiary of a public company may not
issue shares other than equity, preference and Cumulative Convertible Preference Shares (CCPS).
Further, SEBI has allowed companies to issue other financial instruments subject to its guidelines.
Consequently, many companies have issued to their promoters and directors convertible
warrants which can be converted into shares by them at their convenience at any time within 18
months from the date of their issue.

9.2.1 Preference Share

A preference share is one which carries the following two rights, over holders of equity shares:
1. A preferential right in respect of dividends at a fixed amount or at a fixed rate,
2. A preferential right in regard to repayment of capital on winding up.

The preference or priority of the preference shareholders is in relation to the rights of equity
shareholders [s.85].

9.2.2 Participating and Non-participating Shares

If a preference share carries either one or both of the following rights then it is known as a
participating share:
1. To participate further in the profits either along with, or after payment of a certain rate of
dividends on equity shares,
2. To participate in the surplus assets at the time of winding up [s.85].
Thus, if a preference share does not carry either of these rights, then it will be known as a
non-participating share. It should be remembered that, preference shares are always presumed
to be non-participating unless, expressly described as participating.

9.2.3 Cumulative and Non-cumulative Preference Shares

If a preference share carries the right for payment of arrears of dividend from future profits, then
such a share is known as cumulative preference share. Thus, dividends not paid in any year or
years accumulate and are paid out whenever profits are available.

If a preference share does not carry the right to dividend in arrears, then such a preference share
is known as non-cumulative or simple share. Thus, if no profits are available in a year, the
holders get nothing nor can they claim unpaid dividend in subsequent years. It should be
remembered that preference shares are always presumed to be cumulative unless expressly
described as non-cumulative.

9.2.4 Redeemable and Irredeemable Shares

A preference share which can be redeemed upon the resolution of the board of directors, if the
articles so provide, is known as redeemable preference share (s.80). A company can issue
redeemable preference shares if it complies with the following requirements:
1. Such shares are to be issued as redeemable preference shares; shares issued earlier cannot
be converted into redeemable preference shares;
2. There must be authority in the articles to issue redeemable preference shares;
3. The shares can be redeemed only when they are fully paid up;

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