Preference shares are a class of shares that carry a preferential right to receive dividends at a fixed rate and priority in repayment of capital on winding up, ahead of equity shareholders. Under Indian law, preference share capital is defined in Section 43(b) of the Companies Act, 2013, and the framework for their issue and redemption is governed by Section 55.
Legal definition
Section 43(b) of the Companies Act, 2013 defines preference share capital:
"Preference share capital", with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to —
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.
Section 55 provides that no company limited by shares shall issue any preference shares which are irredeemable. Every preference share issued must be redeemed within a period not exceeding twenty years from the date of its issue, except for infrastructure companies where the period may extend to thirty years.
How courts have interpreted this term
Bajaj Hindustan Ltd. v. Sir Shadi Lal Enterprises Ltd. (2011) 1 SCC 640
The Supreme Court examined the rights of preference shareholders and held that while preference shareholders enjoy a priority right to dividends and capital repayment, the declaration of dividends remains at the discretion of the board and the company in general meeting. The Court clarified that the preferential right to dividends does not create an automatic entitlement — dividends must still be declared out of distributable profits.
Mrs. Bacha F. Guzdar v. Commissioner of Income Tax AIR 1955 SC 74
The Supreme Court held that a shareholder's right in a company is a right to participate in the profits and in the assets on winding up, and that this right is governed by the terms of issue of the shares. For preference shareholders, this right is defined by the fixed rate of dividend and priority of repayment specified in the terms of issue.
Types of preference shares
Indian law and practice recognise several sub-categories:
- Cumulative preference shares: If the company cannot pay dividends in a particular year, the unpaid dividend accumulates and must be paid in subsequent profitable years before any equity dividend is declared.
- Non-cumulative preference shares: The right to unpaid dividends lapses if not declared in a given year; arrears do not accumulate.
- Participating preference shares: In addition to the fixed dividend, holders share in surplus profits alongside equity shareholders after a specified dividend is paid on equity.
- Non-participating preference shares: Holders receive only the fixed dividend rate and do not share in surplus profits.
- Convertible preference shares: May be converted into equity shares after a specified period or upon occurrence of certain conditions, subject to the terms of issue.
- Non-convertible preference shares: Must be redeemed for cash at maturity and cannot be converted into equity.
Why this matters
Preference shares occupy a middle position between equity shares and debentures in the capital structure of a company. They offer investors a fixed return with priority over equity shareholders, while offering the company a mechanism to raise capital without diluting voting control — preference shares typically do not carry voting rights except in specific circumstances prescribed under Section 47(2), such as when dividends remain unpaid for two or more consecutive years.
For companies, preference shares are an attractive financing instrument when they wish to raise capital without immediately diluting equity control. For investors, they offer downside protection through the fixed dividend and priority repayment features, though the returns are capped compared to equity participation.
Practitioners should note that the Companies Act, 2013 prohibits the issuance of irredeemable preference shares. Every preference share must be redeemed within twenty years (thirty years for infrastructure companies). If a company fails to redeem preference shares on the due date, it shall not issue any further preference shares or declare any dividend on equity shares until the redemption obligation is fulfilled, as provided under the proviso to Section 55(2).
Related terms
Broader concepts:
Related instruments:
Related procedures:
Frequently asked questions
Do preference shareholders have voting rights?
Generally, preference shareholders do not have voting rights on matters other than those directly affecting their rights (Section 47(2)). However, if the dividend on preference shares remains unpaid for two consecutive years or more, preference shareholders acquire voting rights on all matters until the arrears are fully paid.
Can preference shares be irredeemable in India?
No. Section 55(1) of the Companies Act, 2013 prohibits the issuance of irredeemable preference shares. All preference shares must be redeemable and must be redeemed within twenty years from the date of issue (thirty years for infrastructure companies).
What happens if a company does not redeem preference shares on time?
The company cannot issue further preference shares or declare dividends on equity shares until the defaulting preference shares are redeemed. Additionally, holders of unredeemed preference shares acquire voting rights under Section 47(2), and the company may face penalties under the Act for non-compliance.
How are preference shares different from debentures?
Preference shares represent ownership in the company with a right to dividends (which are paid from profits), while debentures represent a debt obligation with a right to interest (which is a contractual liability). Preference shareholders rank after debenture holders but before equity shareholders in the order of priority during winding up.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.