Preference Shares

Preference share represents a particular portion of the share capital which has been endowed with certain preferences and limitations. It represents a hybrid security that partakes some characteristics of equity shares and some attributes of debentures. Section 85 of the Indian Companies Act defines preference share capital as that part of share capital of a company which fulfils the following requirements:

1. During the continuance of the company, it must be assured of preferential dividend. The preferential dividend may consist of a fixed amount payable to preference shareholders before anything is paid to the ordinary shareholders, or the amount payable as preferential dividend may be calculated at a fixed rate.
2. On winding up of the company, it may carry a preferential right to be paid, i.e., the amount paid upon preference shares must be paid back before anything is paid to the ordinary shareholders. This preference, unless there is an agreement to the contrary, exists only upto the amount paid up or deemed to have been paid up on the shares.

Classification. Preference shares can be classified as:
• Cumulative and Non-cumulative
• Redeemable and Irredeemable
• Convertible and Non-convertible
• Participating and Non-participating
These are now briefly explained.