Cumulative and non-cumulative preference shares

If there are no profits in one year and the arrears of dividends are to be carried forward and paid out of the profits of subsequent years, the preferences shares are said to be cumulative. But if the unpaid dividend lapses, the shares are said to be non-cumulative. Unless otherwise stated in the Articles, all preference shares are presumed to be cumulative.

Redeemable and irredeemable preference shares. When the preference shares are redeemable or can be exchanged for money or goods at the end of the stipulated period, it is known as redeemable preference shares. Under Section 8 of the Companies Act, a company has the power to issue redeemable preference shares. But there must be an authority to issue redeemable preference shares in the articles of the company. The option of redemption lies with the company, i.e. the company may choose to pay back the holders of such shares. The act of paying back is called redemption.

There are a few conditions for redemption:
1. The shares which are to be redeemed should be fully paid up.
2. Shares shall be redeemed only out of profits or by making a fresh issue of equity shares.
3. If any premium is payable on redemption, the amount must have been provided for out of the profits of the company or out of the company’s share premium account.
4. Where redemption is made out of profits, a sum equivalent to the amount paid on redemption shall be transferred to a reserve fund called the Capital Redemption Reserve Account.

Irredeemable shares are non-refundable to the shareholders during the life time of the company. But the amendment of the Companies Act in 1988 has abolished the category of irredeemable preference shares. No company shall issue preference shares redeemable after the expiry of a period of 10 years from the date of issue.

Convertible and non-convertibles preference shares. Convertible preference shares are those which can be converted into equity shares within a stipulated period of time. The terms of issue may provide such a right to preference shares. These shares may be given an option after five years to convert into ordinary shares at a certain conversion rate.
The preference shares which are not convertible into equity shares are called non- convertible preference shares.

Participating and non-participating preferences shares. Inspite of having a fixed rate of dividend, the participating preference shareholders share in the surplus of the company. They have tow dividends. One is fixed by the articles and the other would be fluctuating according to the size of surplus profits left after paying a certain dividend on ordinary shares.
Non-participating preference shares are nothing but ordinary preference shares which carry only the fixed rate of dividend.