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Preference shares without dividend

yash (article) (83 Points)

22 July 2010

Sir, please clarify

The Company has issued in year 2009 non-cumulative redeemable
preference shares. the terms of issue are silent about any dividend.
No dividend is paid by the Company although Company had profits but it
wished to retain the same. The query is :

1. is it possible to issue Preference shares without mentioning the
entitlement as to fixed rate of dividend ??

2. Is it require to pay dividend to the preference shareholders for
the year 2009-10 ??

Regards

Yash

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5 Replies

Jagruti (CS) (Service) (1953 Points)
Replied 23 July 2010

The meaning of Pereference Shares is that they have priority in payment of Dividend. Hence you should pay dividend whenever you pay to equity shareholders in case of non cumulative preference shares.

If no rate is stated in the terms of preference shares than you have to get shareholders approval for declaring dividend.

Also if company has profit in 2009-10 than it has to declare dividend before making payment to equity shareholders.

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Priya Sharma (Company Secretary & Student.MBA) (998 Points)
Replied 23 July 2010

Hii Yash

The Preference shareholders enjoy priority in the payment of dividend over the equity shareholders.The Company has to pay dividend on the preference shares to its holders,irrespective of the fact whether the Company has made profit or not.

However, in the case of cumulative preference shares, the Company can accummulate the dividend payable, in case of loss in any financial year and then pay it out to the holders in the year of profit.

However this privilege is not available to the Non-cumulative preference shareholders, that is to say, if the COmpany has incurred loss in any financial year, then in that case it need not pay dividend to the preference shareholders, there is no provision for the accummulation of dividend.

Coming to your case:

Since the Company has made profit in the FY 2009-2010, it should be the responsibilty of the Company to pay dividend to the Preference shareholders ,untill and unless they have consented for the same.

But still wait for the views of the experts.

Regards

Priya Sharma

CS (Final) Student

1 Like

yash (article) (83 Points)
Replied 29 July 2010

Thanks for your reply...

But as per Sec 85 of Co. Act

"Preference share capital" means, with reference to any company limited by shares, whether
formed before or after the commencement of this Act, that part of the share capital of the
company which fulfils both the following requirements, namely :-
(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount
or an amount calculated at a fixed rate, which may be either free of or subject to income-tax;

Thus,

I think Company must State Dividend percentage at the time of issue.

Attached File : 14 companies act 1956 section 85.pdf downloaded: 545 times

vivek (CS) (751 Points)
Replied 30 July 2010

Upto my limited understanding,

1. Preference Shares can be issued without any fixed %age of dividend rate because Section 85 of the Companies Act, 1956 is having a Explanation part which is containing NOTWITHSTANDING CLAUSE and Point ii of explanation is self explanatory by way of which we can issue 0% Preference Shares. I am reproducing the Section 85 with few highlighted lines:-

85. Two kinds of share capital.—(1) "Preference share capital" means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely:—

(a) that as respects dividends it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax; and (b) that as respect capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid-up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely—

(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and

(ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

Explanation.—Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:—

(i) that, as respects dividends, in addition to the preferential right to the amount specified in clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;

(ii) that, as respects capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in clause (b), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

(2) "Equity share capital" means, with reference to any such company, all share capital which is not preference share capital.

(3) The expression "preference share" and "equity share" shall be construed accordingly.

Regards,