Preference shares may be classified according to the rights attached to them as follows:
1. Cumulative and Non-cumulative Preference shares
Cumulative preference shares enjoy the right to receive the dividend in arrears for the years in which company earned no profits or insufficient profits, in the year in which company earns profits.
In case of non-cumulative preference shares dividend does not accumulate and therefore, no arrears of dividend will be paid in the year of profits. If company does not have any profits in a year, no dividend will be paid to non-cumulative preference shareholders.
2. Redeemable and Irredeemable Preference Shares
Redeemable Preference shares are preference shares which have to be repaid by the company after the term of which for which the preference shares have been issued.
Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company. 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:
a) It must be authorised by the articles of association to make such an issue.
b) The shares will be only redeemable if they are fully paid up.
c) 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.
d) 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.
e) 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.
3. Convertible and Non-convertible preference shares
Where the preference shareholders are given a right to covert their holding into ordinary shares, within a specified period of time, such shares as known as convertible preference shares.
The holders of non-convertible preference shares have no such right of conversion.
4. Participating and Non-participating Preference Shares
The holders of participating preference shares have a right to participate in the surplus profits of the company remained after paying dividend to the ordinary shareholders and preference shareholders at a fixed rate.
The preference shares which do not have such right to participate in surplus profits, are known as non-participating preference shares.