What are the types of preference shares?

Short answer: Preference shares are company shares that carry a preferential claim over ordinary equity shares for dividends. They come in several types, grouped by how they pay dividends, whether they share in surplus profits, whether the company can buy them back, and whether they can convert into equity. A single preference share can belong to more than one of these groups.

Last reviewed: 3 November 2026

At a glance

How do cumulative and non-cumulative shares differ?

A dividend is the part of a company’s profit paid out to its shareholders. Cumulative preference shares let an unpaid dividend build up as arrears, meaning dues carried forward until they are paid. Those arrears must be cleared before common shareholders, the holders of ordinary equity shares, receive any dividend.

Non-cumulative preference shares work differently. They pay dividends only out of the current year’s profits, so a skipped dividend is permanently lost and cannot be recovered in later profitable years. The difference matters most during a loss-making stretch.

Here is a hypothetical example with invented figures. Suppose a company has 10,000 preference shares of Rs 100 each, a total of Rs 10 lakh, carrying a fixed 8 per cent dividend, or Rs 8 per share and Rs 80,000 a year. If the company earns no profit and skips the dividend for two years, the unpaid total is Rs 1,60,000. Under cumulative terms, that Rs 1,60,000 stays as arrears and must be paid before any common shareholder receives a dividend. Under non-cumulative terms, the same amount is gone for good.

What do participating and non-participating shares receive?

Non-participating preference shares pay only their predetermined fixed dividend. They receive no share of surplus profits, however profitable the company becomes. Surplus profits are the profits left over after the fixed dividends have been paid.

Participating preference shares pay a fixed dividend and also share in surplus profits or assets alongside ordinary shareholders. The conditions for that sharing are set in the share terms, so the terms decide how much the holder can receive beyond the fixed dividend. Reading those conditions before looking at the fixed rate is the only way to know the full range of payouts.

Can the company buy the shares back?

Redeemable preference shares can be bought back by the issuing company at a fixed price, either on a fixed date or on advance notice. Whether the company exercises that right is its decision, so the timing is only as certain as the share terms make it.

Irredeemable preference shares cannot be repaid while the company continues operating. They are repaid only when the company winds up, which means it closes and distributes what is left to those with claims on it. For a holder, the capital stays tied up for as long as the company operates, and that period has no fixed end.

Can preference shares turn into equity?

Convertible preference shares give the holder the right to convert them into common equity shares at a predetermined ratio. The conversion becomes available after a set period or on a specified milestone. Common equity shares are ordinary shares that represent ownership in the company.

Non-convertible preference shares carry no right to be converted into equity shares. They behave like fixed-income instruments, which are securities that pay a set return at set intervals, and they pay a steady fixed dividend. The ratio on a convertible share does not move with the company’s share price. If the ordinary shares rise or fall after issue, the ratio stays the same, so the value of conversion depends on the price at the time it becomes available.

Do preference shares carry voting rights?

Preference shares generally carry no voting rights. Some issues grant voting rights in specific situations, such as a dividend default, which means a dividend that was due has not been paid. A holder without votes has no say through a vote in ordinary company decisions.

Frequently asked questions

Is a cumulative preference share better than a non-cumulative one?

The two differ in how a skipped dividend is treated, not in a ranking of quality. Cumulative shares keep unpaid dividends as arrears that must be cleared before common shareholders are paid, while non-cumulative shares lose a skipped dividend permanently.

Can a preference share be repaid while the company is still operating?

Only if it is redeemable. Redeemable shares can be bought back at a fixed price on a fixed date or on advance notice, while irredeemable shares are repaid only when the company winds up.

Do all preference shares give me a vote?

No. Preference shares generally carry no voting rights, though some issues grant them in specific situations such as a dividend default.

What happens to a convertible preference share?

The holder can convert it into common equity shares at a predetermined ratio, after a set period or on a specified milestone. Non-convertible preference shares carry no such right.

Sources and last check

Facts in this article were checked against the sources below on 3 November 2026. Rules and figures can change; check the primary source before acting.

• groww.in (broker education)
• kotakneo.com (broker education)
• upstox.com (broker education)
• icicidirect.com (broker education)

This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.