What is a ‘Preference Share’? Describe the different types of preference shares.
According to Section 43 of The Companies Act, 2013, a preference share is one that fulfils specific conditions regarding dividend and capital repayment. It forms a part of the share capital of a company.
The first condition is that it carries a preferential right to dividend. This dividend is paid as a fixed amount or an amount calculated at a fixed rate of the nominal value of the share. This payment is prioritised and must be made before any dividend is paid to the equity shareholders.
The second condition is that it carries a preferential right to capital repayment. In the event of the winding up of the company, the capital is repaid to preference shareholders before anything is paid to the equity shareholders.
Apart from these preferential rights, the holder may have a right to participate in the surpluses of the company as specified in the Memorandum or Articles. Thus, preference shares can be participating or non-participating.
Furthermore, preference shares can be classified into other types based on the rights attached. These include cumulative or non-cumulative shares, and redeemable or irredeemable shares.
Explanation
The answer is derived directly from Section 1.4.1 of the provided context. It defines preference shares using the two statutory conditions (preferential right to dividend and preferential right to capital repayment) and lists the variations (participating/non-participating, cumulative/non-cumulative, and redeemable/irredeemable) explicitly mentioned in the text.