Q.Explain the different kinds of preference shares that a company may issue.

Preference shares are not a single uniform instrument — the terms attached to dividend, participation, convertibility, and redemption create several recognised varieties.

A single preference share can combine more than one of these features at once — for example, cumulative and convertible together — so long as the articles and issue terms authorise the combination.

Preference shares carry a common core — a preferential right to a fixed dividend and to repayment of capital ahead of equity shareholders — but the specific terms attached to that core can vary, giving rise to several recognised kinds.

Cumulative preference shares carry forward any dividend not paid in a particular year as an arrear; the arrears, together with the current year's dividend, must be paid in full before any dividend can reach equity shareholders in a later, profitable year. Non-cumulative preference shares, by contrast, simply lose the right to that year's dividend if the company does not have sufficient profit to pay it — the unpaid amount does not accumulate as a claim on future years' profits.

Participating preference shares carry, in addition to their fixed preferential dividend, a further right to participate with equity shareholders in any surplus profit (and, on some terms, in surplus assets on winding up as well) after the fixed dividend and the equity dividend at a specified rate have both been paid. Non-participating preference shares are confined strictly to the fixed preferential dividend, with no claim on any surplus beyond it — this is the more common and default form unless the terms of issue expressly provide for participation.

Convertible preference shares carry an option, on terms fixed at the time of issue, to convert into equity shares after a specified period or on a specified event, giving the holder a route to the higher (but riskier) equity return later if the company performs well. Non-convertible preference shares carry no such option and remain preference capital throughout their tenure, being repaid only on redemption.

Finally, every preference share, whatever combination of the above features it carries, must be redeemable — Section 55 of the Companies Act, 2013 expressly bars a company limited by shares from issuing an irredeemable preference share, or one redeemable beyond twenty years from the date of issue, except for a permitted class of infrastructure projects, where redemption may extend up to thirty years subject to conditions including annual redemption of a minimum percentage of such shares at the option of the preference shareholders. A company is free to combine these features — a "cumulative, participating, convertible preference share," for instance — provided its articles authorise the combination and the precise terms are stated clearly at the time of issue.