Page 14 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 1: Financial System

2. Preference shares: Preference shares are the shares which carry preferential rights over the Notes
equity shares. These rights are:
1. receiving dividends at a fixed rate,

2. getting back the capital in case the company is wound-up.
Investment in these shares are safe, and a preference shareholder also gets dividend
regularly. Preference Shares may be of following types:

(a) Cumulative or non-cumulative: A non-cumulative or simple preference share gives
right to fixed percentage dividend of profit of each year. In case no dividend thereon
is declared in any year because of absence of profit, the holders of preference shares
get nothing nor can they claim unpaid dividend in the subsequent year or years in
respect of that year. Cumulative preference shares however give the right to the
preference shareholders to demand the unpaid dividend in any year during the
subsequent year or years when the profits are available for distribution. In this case
dividends which are not paid in any year are accumulated and are paid out when the
profits are available.
(b) Redeemable and non-redeemable: Redeemable Preference shares are preference shares
which have to be repaid by the company after the term for which the preference
shares have been issued. Irredeemable Preference shares are those preference shares
that need not be repaid by the company except on winding up of the organisation.
However, under the Indian Companies Act, a company cannot issue irredeemable
preference shares. In fact, a company limited by shares cannot issue preference
shares which are redeemable after more than 10 years from the date of issue. In
other words the maximum tenure of preference shares is 10 years. If a company is
unable to redeem any preference shares within the specified period, it may, with
consent of the Company Law Board, issue further redeemable preference shares
equal to redeem the old preference shares including dividend thereon. A company
can issue the preference shares which from the very beginning are redeemable on a
fixed date or after certain period of time not exceeding 10 years provided it comprises
of following conditions:
i. It must be authorised by the articles of association to make such an issue.

ii. The shares will be only redeemable if they are fully paid up.
iii. The shares may be redeemed out of profits of the company which otherwise
would be available for dividends or out of proceeds of new issue of shares
made for the purpose of redeem shares.
iv. If there is premium payable on redemption it must have provided out of
profits or out of shares premium account before the shares are redeemed.

v. When shares are redeemed out of profits a sum equal to nominal amount of
shares redeemed is to be transferred out of profits to the capital redemption
reserve account. This amount should then be utilised for the purpose of
redemption of redeemable preference shares. This reserve can be used to issue
of fully paid bonus shares to the members of the company.
(c) Participating preference share or non-participating preference shares: Participating
preference shares are entitled to a preferential dividend at a fixed rate with the right
to participate further in the profits either along with or after payment of certain rate
of dividend on equity shares. A non-participating share is one which does not have
any such right to participate in the profits of the company after the dividend and the
capital have been paid to the preference shareholder.

LOVELY PROFESSIONAL UNIVERSITY 9