Preference Shares in a Private Limited Company

This article talks about preference shares and will help you understand everything about them, including its types and the rules that governs its issuance.

Preference shares are a class of shares which are entitled to the holder on the basis of a fixed dividend payment. There is a rule that the payment of the preference share dividends takes priority over ordinary share dividends.

As per the Companies Act, 2013, any Private Limited Company or a limited company has the rights to issue preference shares if authorised by the articles of association of the enterprise.

All the preference shares which have been issued by a company in India are redeemable and should be redeemed within 20 years of its issuance.

Here is a brief on the various kinds of preference shares and the process of issuing preference shares in a private limited company in India.

Preference Shares

To fulfil the eligibility of a preference share, that particular share must necessarily fulfil the following conditions as listed in the Companies Act, 2013:

• The preference shareholders have a preferential right to receive a dividend of a fixed amount, or a flat rate which can either be subject to income tax or it may be free from income tax.
• The carriers of the preference share will carry preferential right in case there is a condition of winding up to repayment of the capital paid up or deemed to have been paid up.

Types of Preference Shares

Preference shares can be classified into following categories based on the rights:

1. Cumulative Preference Shares

The cumulative preference shareholders are entitled to get the dividend for a year where the dividends could not be paid due to the losses or inadequate profit in the subsequent year’s whenever there are sufficient profits.

2. Non-Cumulative Preference Shares

The non-cumulative shareholders are not entitled to receive the dividend for a year where the dividends could not be paid in the subsequent years.

Therefore in case of the non-cumulative preference share, the rights to the dividend for a year cannot be carried over in the following year(s)

3. Participating Preference Shares

There are certain participating preference shares which are eligible for receiving some surplus profit or dividends in the company, in addition to being entitled to some fixed dividends as well.

4. Non-participating Preference Shares

The non-participating shares are the ones which are not supposed to participate in the surplus profits of the company. The non-participating preference shares are only entitled to the fixed dividend payments.

5. Redeemable Preference Shares

The redeemable preference share can be redeemed by the company within 20 years from the date of issue.

6. Irredeemable Preference Shares

The irredeemable preference shares are those shares which would not be redeemed by a company. The Companies in India are not allowed to issue irredeemable preference shares.

7. Convertible Preference Shares

The convertible preference shares are those which can be converted into equity shares of the company as mentioned in the terms and conditions of their issue.

8. Non-convertible Preference Shares

The non-convertible preference shares are not convertible into equity shares of the company, but they retain their preferential value to the payment of capital when in case of winding up of the concerned company.
 

Issuing of Preference Shares in a Private Limited Company

A Private Limited Company or a Limited Company which have share capital have the right of issuing preference shares if authorised by the Articles of Association of the company, subject to following conditions:

• The issuing of the preference shares by the concerned company has to be authorised bypassing a resolution at a general meeting of the company.
• The concerned company while in the time of issuing preference shares should not have defaulted in the redemption of the preference shares being issued either before or after the commencement or in payment of dividend due on the preference shares.

In addition to the above clauses, the company which is issuing preference shares must necessarily set out in the Articles of Association of the company by following the below regulations:

1. There would be priority of preference shares with respect to dividend payment and repayment of the capital over equity shares
2. Participation in the surplus funds of the company
3. Participation should be in the surplus assets and profits, on winding up the company
4. Paying of dividend on cumulative or non-cumulative basis
5. Converting of the preference shares into equity shares
6. Voting rights of the preference shares
7. Redemption of the preference shares