Cumulative Preference Shares: Meaning & 5 Key Differences
The Cumulative preference shares have always been a special type of corporate finance instrument. They lie in between equity and debt, and provide the investors with potential, fixed returns with lower risk than the ordinary shares. Out of the various varieties of preference shares, the two most common varieties and most misconceived are the cumulative preference and the non-cumulative ones.
The terms such as the meaning of cumulative preference share, what are cumulative preference shares and the difference between cumulative and non cumulative preference shares are regularly sought by the investors, analysts, and students. However, effective, untroubled and organized explanations are not common.
Cumulative and Non Cumulative Preference Shares: Key Differences
A clear comparison helps simplify both concepts.
Feature | Cumulative Preference Share | Non Cumulative Preference Share |
Dividend accumulation | Yes, unpaid dividends carry forward | No, unpaid dividends lapse |
Investor protection | Higher | Lower |
Company obligation | Higher burden for company | Lower burden for company |
Dividend arrears | Paid in future | Not applicable |
Suitable for investors | Income-focused, conservative | High-risk investors |
Suitable for companies | Stable or predictable profits | Volatile or uncertain profits |
This comparison is essential for SEO queries involving cumulative and non cumulative preference share, as investors want fast, digestible differences.
What Are Preference Shares? A Quick Overview
Before understanding cumulative and non-cumulative categories, it is important to clarify what preference shares are.
Preference shares (or preferred shares) are equity instruments that provide certain “preferences” over ordinary shareholders, such as:
- Priority in receiving dividends
- Priority in capital repayment during liquidation
- Fixed or pre-defined dividend rates
Preference shareholders do not usually have voting rights, but they enjoy more predictable returns.
With this foundation, we can now explore cumulative and non cumulative preference shares in detail.
Cumulative Preference Share Meaning
What Are Cumulative Preference Shares?
Cumulative preference share is a type of preference share that accumulates unpaid dividends.
This means:
If a company is unable to pay dividends in a particular year due to losses or cash flow issues, the unpaid dividend for that year is carried forward and must be paid in the future when profits return. This unpaid amount is known as dividend arrears.
Why is Cumulative Preference Share Attractive?
They give investors a safety net. Regardless of the company’s short-term financial struggles, dividend obligations are not canceled; they accumulate and remain payable.
This feature makes cumulative preference share appealing for:
- Conservative investors
- Income-focused investors
- Institutions seeking predictable returns
This is why the keyword cumulative preference share is widely searched by individuals trying to understand dividend safety and stability.
Features of Cumulative Preference Shares
1. Dividend Accumulation
If dividends are skipped, they accumulate as arrears.
2. Priority Over Equity
Cumulative preference shareholders must receive full accumulated dividends before equity shareholders are paid.
3. Reduced Risk
Due to guaranteed arrears, risk is lower than for non cumulative preference share.
4. Attractive for Long-Term Investors
Investors expecting future profitability prefer cumulative preference share because arrears add to future income.
5. Used in Private & Public Companies
Many startups and private companies issue cumulative preference share to attract institutional investors.
Real-World Example of Cumulative Preference Share
Imagine Company X issues a cumulative preference share that pays a fixed dividend of ₹10 per year.
Year 1 profit: Company cannot pay dividends – Arrears accumulate (₹10)
Year 2 profit: Still unable to pay – Arrears accumulate again (₹10)
Year 3 profit: Company pays dividends
Total payment to cumulative preference shareholders =
₹10 (Year 1) + ₹10 (Year 2) + ₹10 (Year 3) = ₹30 per share
This demonstrates why cumulative preference share are more protective for investors.
What Are Non Cumulative Preference Shares?
While cumulative preference share accumulate unpaid dividends, it works the opposite way. It does not accumulate unpaid dividends.
Meaning:
If the company cannot pay dividends in a certain year, the investor simply loses that year’s dividend. It does NOT carry forward.
Many investors search it to understand why some companies choose not to accumulate dividends. The reason is simple: it reduces long-term financial obligations for the company.
Features of Non Cumulative Preference Share
- No Dividend Accumulation: Unpaid dividends expire permanently.
- Lower Obligation for Companies: Companies prefer issuing them when future cash flows may fluctuate.
- Only Paid When Profitable: Dividends are paid only if sufficient profits exist in that financial year.
- Higher Uncertainty for Investors: Income is not guaranteed compared to cumulative preference share.
- Often Used by Financial Institutions: Banks and NBFCs sometimes issue non cumulative preference share to comply with regulatory capital norms.
Advantages of Cumulative Preference Share
- Dividend security via accumulation
- Predictable long-term returns
- High priority during payout
- Attractive for cautious investors
- Provides stability in volatile market conditions
Advantages of Non Cumulative Preference Share
- Lower cost for companies
- Useful during unpredictable profit cycles
- More flexibility in managing cash flows
- Often offered with higher dividend rates to compensate for risk
Disadvantages of Both Types
Cumulative Preference Share – Drawbacks
- Higher burden on company profits
- Dividend arrears can accumulate into large liabilities
- Less attractive to companies needing liquidity flexibility
Non Cumulative Preference Share – Drawbacks
- Uncertain income for investors
- Higher risk of losing dividends
- Less investor-friendly during economic downturns
When Should Investors Choose Cumulative Preference Share?
Select them when:
- You prefer stable income
- You want dividend safety
- You are investing long term
- You want lower risk exposure
- You believe the company will recover profitability
Investors looking for protection often search cumulative preference share meaning or what are cumulative preference share to understand how dividend arrears work.
When Should Investors Choose Non Cumulative Preference Share?
Choose non cumulative preference share when:
- You are comfortable with risk
- You prefer higher dividend rates
- You want exposure to financial companies
- You believe profits may remain stable annually
- You prioritize growth over guaranteed income
Investor Checklist Before Choosing Between Cumulative and Non-Cumulative Preference Shares
Before investing, assess:
- Dividend policy of the company
- Past profit trends
- Expected future cash flows
- Regulatory obligations (especially for banks)
- Whether dividends are guaranteed or dependent on profits
- Corporate governance and payout history
This ensures you choose the correct type according to your risk tolerance.
Practical Example: Comparing Both Types
Type | Dividend Rate | Payment Situation |
Cumulative Preference Share | ₹12 annual | Company skips 2 years – Later pays ₹36 in year 3 |
Non Cumulative Preference Share | ₹15 annual | Company skips 2 years – Only ₹15 paid in year 3 |
Although non cumulative offers higher rates, cumulative preference share provide higher certainty.
Why Do Companies Issue Cumulative Preference Share?
Companies issue cumulative preference share when:
- They want to attract risk-averse investors
- They want long-term capital without losing control
- They want to avoid diluting voting rights
Dividend accumulation makes the offering attractive.
Why Do Companies Issue Non Cumulative Preference Share?
Companies prefer non cumulative shares when:
- Profitability is inconsistent
- They want limited dividend obligations
- They operate in capital-intensive industries
- They want regulatory-compliant instruments
Financial institutions frequently use these instruments to strengthen Tier-I capital.
Future of Preference Shares in India
With India’s rapidly developing corporate debt and equity markets, preference shares – especially cumulative preference share – remain attractive hybrid instruments for fundraising.
Retail investors are increasingly exploring them for steady income, while companies continue to refine their capital structure using different preference share types.
Conclusion
Learning cumulative preference share and non cumulative preference share is a requirement of an investor wishing to have a hybrid mode of investment that will provide them with both the properties of fixed-income securities and rights of equity securities. Cumulative preference shares offer security of dividends whereas non cumulative preference share are more flexible to companies but risky to the investors.
With the current transformation in the corporate financing environment in India the two versions of preference shares will remain a significant part of company capital and investor portfolio. As an investor, student or a professional in the field of finance, understanding the differences will enable you to make better and more confident decisions.
FAQ'S
What are cumulative preference shares?
Cumulative preference share meaning is to accumulate unpaid dividends and ensure that investors receive the full amount in future years before equity shareholders are paid.
What are non cumulative preference shares?
Non cumulative preference share do not accumulate unpaid dividends. If dividends are skipped, investors lose them permanently.
Is cumulative preference share safer?
Yes. Since unpaid dividends become arrears, cumulative preference share offer more security and predictable returns.
Why do companies issue non cumulative preference share?
Companies issue them to reduce long-term dividend obligations and retain flexibility during years of low profitability.
What is the difference between cumulative and non cumulative preference shares?
Cumulative preference share accumulate unpaid dividends, while non cumulative preference share do not. This impacts dividend certainty and risk.
