Page 10 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 1: Share Capital – Issue of Shares

1. Preference Shares: According to Section 85, preference shares are those shares which enjoy Notes
the following two rights:
(a) Right to receive dividend at a fixed rate before any dividend is paid to equity
shareholders.
(b) Right to receive repayment of capital in the event of winding up, before the capital
of equity shareholders is returned.

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Caution In any condition, a preference shareholder cannot compel the company to pay his
dividend. He can only prevent the company from paying dividend to equity shareholders
without his dividend being paid first. In addition to these two preferential rights, a
preferential shareholder may carry some other rights. On the basis of additional rights,
preference shares can be classified as under:
(i) Cumulative vs. Non-Cumulative Preference Share: There is however, no obligation to
pay until dividend is declared. The arrears of dividend are therefore, shown at the
footnote of balance sheet as contingent liabilities only. Non-cumulative preference
shareholders are entitled to take a fixed dividend only out of the profit each year. If in
any year, due to shortage of profit, dividend is not paid to them, there will be no
accumulation for unpaid dividend. The unpaid balance of dividend will automatically
lapse.
(ii) Redeemable vs Irredeemable Preference Share: Redeemable Preference Share is that
share whose amount is returned by the company to the shareholder within the lifetime
of the company as per the provisions of Section 80 and Section 80A of the Companies
Act 1956. The amount of irredeemable preference share can be returned only when
the company is wound up. After the commencement of the Companies (Amendment)
Act 1988, no company limited by shares can issue any preference share which is
irredeemable. The Act also provides for the redemption of such shares issued prior to
the amendment of the Act in 1988.

(iii) Participating vs Non-participating Preference Share: Participating preference shares
are those shares that carry the right of sharing profit left after paying equity and
preference dividend at a stipulated rates. The preference shareholders may also be
extended to participate in the surplus assets available at the time of liquidation after
paying off all equity shareholders. Non-participating preference shares are those
shares which do not carry the right of sharing in the surplus profit after paying a
certain rate of dividend to equity shareholders. These are entitled to receive only the
fixed rate of dividend. Preference shares are assumed to be non-participating.

(iv) Convertible vs Non-convertible Preference Shares: Convertible preference shares are
those which have the right to get them converted into equity shares. When such a
right does not exist, those are called non-convertible prudential shares.

Did u know? Cumulative preference shareholders are entitled to a dividend at a stipulated
rate. If the current year’s profit are not sufficient, such dividend will be accumulated and
will be payable out of future profit. All the arrears of dividend on these shares must be
paid before the equity shareholders can participate in the profit.

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