Redemption of Preference Shares

Topics: Stock, Stock market, Corporate finance Pages: 9 (2170 words) Published: August 2, 2013
Redemption of Preference Shares

The fund provided by the owners in to a business is known as capital. You know that capital of the business depends upon the form of business organization. From ownership point of view, there are number of business organizations like, sole proprietorship business, partnership business, cooperative societies, joint stock companies etc. Total capital of the company is divided into a number of small units of fixed amount and each such unit is called a share. The fixed value of a share register with the registrar of Companies is called face/ nominal value. However, a company can issue shares at a price different from its nominal value or face value. As the total capital of the company is divided into shares, the capital of the company is known as share capital. A company can issue two types shares equity shares and preference shares. The issue of preference shares is one of the important sources of capital of a company. Redemption is the process of repaying an obligation at predetermined amounts and timings. The redeemable preference shares are issued on the terms that share holders will at a future date be repaid amount which they invested in the company. According to the Companies Act, 1956, a company can issue only redeemable shares i.e. at present a company cannot issue irredeemable preference shares

|1.2 Types of Preference Shares |

In previous sections we have discussed different sources of capital. Equity shares get dividend at a rate fixed at the Annual General Meeting (AGM) depending on the profit available for a particular year. The rate of dividend also varies from year to year. The preference shareholders contribute capital to the company. According to section 85 of the Companies Act, 1956, persons holding preference shares, called preference shareholders. They are assured of a preferential dividend at a fixed rate during the life of the company. This type share holders carry preferential right over other shareholders to be paid first in case of liquidation of the company. Companies use this mode of financing as it is cheaper than raising debt. The preference shares can be of various types. These are:

i) Redeemable Preference Shares: A company may issue this type of shares on the condition that the company will repay the amount of share capital to the holders of this category of shares after the fixed period or even earlier at the discretion of the company. Section 80 of the Companies Act, 1956 deals with the redemption of preference shares.

ii) Irredeemable Preference Shares: The preference shares, which do not carry the agreement of redemption are known as irredeemable preference shares.

iii) Convertible Preference Shares: This type of shares enjoy the right to the holder to get them converted into equity shares according to the terms and conditions of the issue.

iv) Non-convertible Preference Shares: The holders of these shares do not enjoy the right to get the shares converted into equity shares. Unless otherwise stated, Preference shares are non-convertible.

v) Participating Preference Shares: The holder of this type of preference shares enjoy the right to participate in the surplus profits, if any, after the equity shareholders have been paid dividend at a rate fixed in the AGM. So the shareholders get additional dividend with their normal dividend.

vi) Non-participating Preference Shares: These shares carry only a fixed rate of dividend without any right to get additional dividend. Unless otherwise stated, The preference shares are non-participating.

vii) Cumulative Preference Shares: The cumulative preference shares carry the right to a fixed amount of dividend. The holders of these shares are entitled to get dividend out of future profit if current year’s profit is insufficient for the same. So, the dividend on these shares accumulates till the final payment.

viii) Non-cumulative Preference Share: In this...
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