EN
Non-cumulative preference shares are a type of preference share where investors receive a fixed dividend, but if the company does not declare the dividend in a particular year, the unpaid dividend is not carried forward to future years.
This article explains what non-cumulative preference shares are and how they work.
Key Takeaways
- Dividends on non-cumulative preference shares come only in the year when profit is earned.
- Unlike cumulative preference shares, skipped dividend payout on non-cumulative preference shares cannot be claimed later.
- These shares outrank equity shares for dividend payment and capital repayment if a company winds up operations; in return, routine voting rights are denied to their holders.
- Dividend payouts attract TDS under Section 194 of the Income Tax Act once the amount paid to a shareholder crosses the prescribed limit in a year.
- Non-cumulative preference shares are suitable for investors who want a higher fixed yield than typical debt instruments and can absorb an occasional missed payout.
What are Non-Cumulative Preference Shares?
Non-cumulative preference shares are a class of preference capital where the right to receive a dividend exists only for the year in which the company actually declares one.
Notably, Section 55 of the Companies Act, 2013 permits only redeemable preference shares in India, and non-cumulative shares fall within this framework.
Holders receive a pre-agreed dividend rate on the face value of the share. This payment is settled ahead of any dividend to equity shareholders. In return for this priority treatment, holders give up the routine voting rights that equity shareholders enjoy.
Company law does grant them voting rights on matters that directly affect their class of shares, and on all resolutions if their dividend stays unpaid for a period of two consecutive years or more under Section 47(2) of the Companies Act, 2013.
How do Non-Cumulative Preference Shares Work?
The dividend on these shares is entirely profit-linked. A company cannot pay out what it has not earned, and it has no obligation to make good a missed year once profits return.
Dividend Payment Mechanism
The board proposes a dividend only if the company has distributable profits for that financial year.
Shareholders receive the pre-fixed rate applied to the face value of each share, subject to shareholder approval at the annual general meeting (AGM).
If profits fall short or the company posts a loss, the board can skip the dividend for that year entirely.
The skipped dividend is not carried forward. Even if the company earns a bumper profit the following year, non-cumulative preference shareholders can only claim that year’s dividend, not the one they missed.
Key Features of Non-Cumulative Preference Shares
- Fixed dividend rate: The payout is set as a percentage of face value at the time of issuance and does not fluctuate with company performance the way equity dividends do.
- No arrears: A missed dividend lapses permanently. There can be no future claim against the company for that year.
- Priority over equity: Dividend payment and capital repayment on liquidation both rank above equity shareholders.
- Conditional voting rights: Holders normally sit outside routine voting, gaining a say only on resolutions affecting their class, or on all matters if dividends stay unpaid beyond the period set by law.
- Mandatory redemption: Indian companies cannot issue irredeemable preference shares. Redemption must happen within 20 years of issue, extendable to 30 years for specified infrastructure projects.
- Can combine with other features: A single issue may also be convertible, participating, or callable, so the non-cumulative tag is just one of several terms to check before investing.
Non-Cumulative Preference Shares: An Example
Consider Company A, which has issued non-cumulative preference shares with a face value of ₹100 and a fixed dividend rate of 8% per year, working out to ₹8 per share annually.
| Year | Company Performance | Dividend Declared | Amount Paid Per Share |
| Year 1 | Healthy profit | Yes | ₹8 |
| Year 2 | Steep loss | No | ₹0 (forfeited, not carried forward) |
| Year 3 | Back to profit | Yes | ₹8 (Year 2 dividend not recovered) |
Even though Company A returns to profit in Year 3, shareholders receive only that year’s dividend. The ₹8 per share missed in Year 2 is gone permanently, and holders have no legal claim to recover it, regardless of how profitable the company becomes later.
Non-Cumulative Vs Cumulative Preference Shares
| Parameter | Non-Cumulative Preference Shares | Cumulative Preference Shares |
| Unpaid dividend | Lapses permanently | Carried forward as arrears |
| Risk to investor | High risk as income can be uneven | Low risk as missed payouts are recovered later |
| Cost to company | Lower long-term liability | Higher liability as arrears must eventually be cleared |
| Typical dividend rate | Usually higher to offset the added risk | Usually lower due to the payment guarantee |
| Best suited for | Investors comfortable with variable income | Income-focused, risk-averse investors |
Advantages of Non-Cumulative Preference Shares
-
These shares offer a dividend rate that is usually higher than what cumulative preference shares or debt instruments of similar tenure provide.
-
They rank above equity shareholders for both dividend payment and repayment of capital during liquidation.
-
They carry a fixed pre-known rate, which makes return projections more straightforward.
-
While they normally carry no voting rights, investors gain powerful protective voting rights across all company resolutions under Section 47(2) of the Companies Act if dividends remain unpaid for two consecutive years or more.
-
For investors willing to accept the risk of a skipped payout during an isolated down year, they capture superior fixed yields compared to standard debt without taking on equity-level volatility.
Risks and Limitations of Non-Cumulative Preference Shares
-
A weak year for the company translates directly into zero income for investors for that year, with no way to recover it later.
-
Limited voting rights mean holders have little say in the decisions that affect the company's ability to pay dividends.
-
Capital appreciation potential is far lower than equity, since these shares are priced around their fixed dividend rate rather than growth prospects.
-
Many issues are privately placed and not listed, which can make an early exit difficult before the redemption date.
Also Read About: Preference Shares
Taxation of Dividend on Non-Cumulative Preference Shares
1. Dividend Payout Taxation
-
Tax Rate: Since the abolition of the Dividend Distribution Tax (DDT) regime, dividend income from preference shares is taxed directly in the hands of the shareholder at their applicable income tax slab rates.
-
Tax Deducted at Source (TDS): A 10% TDS is levied under Section 194 of the Income Tax Act, 1961 once the dividend paid to a resident shareholder crosses the prescribed annual threshold. Investors without a valid PAN on record face a higher TDS rate, making it essential to keep KYC details updated.
2. Redemption and Capital Gains Taxation
Because preference shares are redeemable instruments under the Companies Act, their ultimate redemption or secondary market sale constitutes a "transfer" under Section 2(47) of the Income Tax Act, triggering capital gains consequences rather than ordinary dividend taxation:
-
Holding Period Classification:
-
Unlisted Preference Shares: Held for 24 months or less are classified as Short-Term Capital Gains (STCG); those held for more than 24 months qualify as Long-Term Capital Gains (LTCG).
-
Listed Preference Shares: Held for 12 months or less are classified as STCG; those held for more than 12 months qualify as LTCG.
-
Tax Rates:
-
STCG: Added to the investor's total income and taxed at normal applicable income tax slab rates.
-
LTCG: Taxed at a flat rate of 12.5% (without indexation benefits). For listed preference shares, an overall annual exemption limit applies to LTCG per financial year.
-
Redemption Premium: Any premium paid by the company over and above the face value upon redemption forms part of the full value of consideration for capital gains computation and is not taxed separately as other income.
Also Read About: Types of Preference Share
Who Should Consider Non-Cumulative Preference Shares?
These shares suit investors who want a fixed-income-style return higher than conventional debt and are comfortable accepting an occasional year of no payout in exchange for extra yield.
They may not suit those who need guaranteed, uninterrupted income. Cumulative preference shares or debt instruments serve that need more reliably. As with any preference share, check the issuer’s profitability track record and redemption terms before investing.
Conclusion
Non-cumulative preference shares occupy a specific niche among asset classes: they offer a fixed, priority dividend, but stay unguaranteed. Compared with cumulative preference shares, they cost the issuing company less over time and give it more flexibility. Before investing, you should weigh the issuer’s financial stability, the redemption timeline, and how this instrument fits alongside the rest of your portfolio.
Also Read About: Cumulative Preference Shares
