What are Non-Cumulative Preference Shares?

Two types of shares are allowed by companies: preference shares and equity shares. Preference shares are a more common and straightforward way for companies to raise funds for their business. preference share are not like equity and don't give up any voting rights.

Here are some things you need to know. A company can issue preference shares in many different ways. Non cumulative preference shares is one of them. Continue reading to learn the true meaning of non-cumulative preference shares.

What's a non-cumulative preference share ?

Non cumulative preference shares, also known as preference shares or preference shares, are very different from other types of shares issued by companies. These shares are not equity shares and have a fixed dividend rate. They also enjoy a higher preference for dividend payments and liquidation.

Non cumulative preference shareholders are effectively deprived of any claim to unpaid dividends if the issuing corporation fails to pay or misses the promised dividends. The non cumulative preference shareholders cannot receive dividend arrears from the past unpaid years. If a dividend payment is omitted, it will continue to be that way.

If a company cannot generate revenue for a certain period of time because of any number of issues it may not pay dividends. Non-cumulative preference shares holders would not be entitled to the dividends in such an event and would have to wait for the next dividend date.

Let's take an example to understand non-cumulative preference shares.

Non-cumulative preference shares An example

Let's say that a company called XYZ Ltd. has issued non-cumulative preference shares to the general public. These shares have a face value of Rs. 1,000 shares. The fixed dividend rate is set by the issuing company at 10% of preference shares' face value. The dividend is Rs. 100 per share (Rs. 1000 x 10% The company promises to pay the dividend every year.

The company made enough profits in the first two years to pay the promised Rs. 100 shares. The company was unable to generate sufficient revenue in the third year due to declining sales. The company was unable to pay the promised Rs. 100 per share for the third year.

The company rebounded in the fourth year and began to generate profits again. The dividend was paid at Rs. 100 per share in the fourth year. Non cumulative preference shares holders cannot force the company not to pay dividends that were not paid in the third year.

Non cumulative preference shareholders can't claim the unpaid dividends in the previous year even if there are still profits from the distribution of dividends.

The Advantages of Non-cumulative Preference Shares

We now know what non-cumulative preference shares are. Let's take a look at the benefits these shares provide to investors and the issuing company.

1. Non-cumulative preference shares investors enjoy a higher rate of dividends than equity shareholders or other types of preference shares.

2. Non cumulative preference shareholders have preference over equity shares in respect of the payment of dividends or any other claims during liquidation.

Conclusion

This is something you need to keep in mind. Non cumulative preference shares, while better than equity shares for investors, still has one major drawback. Unpaid dividends cannot be claimed at a later date, as is the case for cumulative preference share. Despite this, non-cumulative preference shares offer the highest rate of dividends among all categories.