Preference Shares are a class of stock that qualifies holders for fixed dividend payments. Payment of Preference Shares dividends takes precedence over common share dividends. Under the Companies Act 2013, an Indian Private Limited Company or Limited Company may issue Preference Shares if permitted by the company’s articles of incorporation. All Preference Shares issued by Indian companies must be redeemable and must be redeemed within  20 years from the date of issue. 

Preference Shares

Preference Shares In Private Limited Company

To qualify for the issuance of Preference Shares, the stock must meet the following two conditions stipulated in the Companies Act 2013: 

The shares hold or shall have a preference right for the payment of dividends of a fixed amount or at a fixed rate may be exempt from or subject to income tax; AND 

Shares include or shall include a preference right in the event of dissolution with the return of capital paid up or deemed to have been paid up.  

You Can Also Click Here To Get Your GST Registration Today.

Types of Preference Shares

Preference Shares can be categorized into the following types based on their rights: 

  • Cumulative Preference Shares

Holders of cumulative Preference Shares are entitled to receive dividends for the year in which they were unable to pay dividends due to loss or lack of profit in the next year or in a fully profitable year. 

  • Non-cumulative Preference Shares 

Holders of non-cumulative Preference Shares are not entitled to dividends for the year in which they were unable to pay dividends the following year. Therefore, for non-cumulative Preference Shares, one year of dividend eligibility will not be granted in subsequent years.

  • Participating Preference Shares 

Participating in Preference Shares is entitled to receive profits or dividends in addition to fixed dividends. 

  • Non-participating Preference Shares

Non-participating Preference Shares are stock that is not eligible to participate in our retained earnings. Non-participating Preference Shares are entitled to only fixed profits. 

  • Redeemable Preference Shares 

Redeemable Preference Shares is the stock that the company redeems within 20 years of the issue date.

  • Irredeemable Preference Shares

Irredeemable Preference Shares is preferred stock that the company does not redeem. Indian companies are not allowed to issue non-redeemable Preference stock.

  • Convertible Preference Shares

Convertible Preference shares can be converted into shares of the company according to the terms and conditions of the issue.

  • Non-convertible Preference Shares 

Non-convertible Preference Shares cannot be converted into equity shares but have priority over the payment of capital in the event of the company’s dissolution.

Issuing Preference Shares in a Private Limited Company

Preference Shares In Private Limited Company

A  limited liability company or a  private limited company with a share capital may issue preference shares in accordance with the following conditions if permitted by the company’s articles of incorporation. 

The issuance of preference shares by the company is approved by a special resolution of the company’s general meeting. And

As of the issue date of such, the Company has not neglected to redeem the preference shares issued before or after the start of the preference shares or pay dividends on the preference shares. 

In addition, companies issuing preference shares must have the following provisions in their articles of incorporation:  

  • Prioritize preference shares over common stock for dividend payments and capital repayments over equity shares;
  • Participation in the company’s excess funds. 
  • Participation in surplus assets and profits at the time of dissolution of the company. 
  • Payment of dividends on a cumulative or non-cumulative basis. 
  • Conversion of preference shares to equity shares
  • Voting rights on preference shares;
  • Cancellation of preference shares;  

Advantages of Preference Shares 

Preference stockholders receive a fixed dividend long before ordinary shareholders see the money. In any case, the dividend will only be paid if the company makes a profit. However, this situation is problematic because a type of Preference Share, called cumulative share, can accumulate unpaid dividends that must be paid at a later date. Therefore, when the struggling company finally recovers and returns to the black, the unpaid dividends will be remitted to the preferred shareholders and then the ordinary shareholders will be paid the dividends. 

  •  Greater claim to company assets 
  •  Additional benefits for investors

Disadvantages of Preference Shares

The main drawback of owning  Preference Shares is that investors in these vehicles do not enjoy the same voting rights as common shareholders. This means that the company is not as committed to preferred stock as traditional equity shareholders. A return on investment guarantee compensates for this shortcoming, but rising interest rates can eliminate the once very profitable fixed dividends. This can encourage remorse from investors with Preference Shareholders. Who might find it better to have a higher interest fixed-income securities?