Preference Share Meaning
These are the shares which are preferred over equity shares in payment of dividend, The first to get dividend are the preference shareholder if the company decides to give out or to pay dividends.
Let’s study in depth what are preference shares?
Preference shares are the shares having favorable rights to claim dividends during the lifespan of the company and to claim refund of the capital on close down. In the case of preferencee shares, the percentage of dividend is fixed i.e. the holders get the fixed dividend before any dividend is paid to the other classes of shareholders
Preference shares are one important source of hybrid financing because it’s has some attribute of equity shares and a few features of debentures. The preference shareholder enjoy special rights with regard to receiving dividends and getting back capital in case the company close down
Features of preference shares :
Preference shares have a wide range of features as corporate highlight a set of features while issuing them such as:
- The dividends for preference shareholders
- In the annual general meeting of a company the preference shareholders have no right to vote
- These are a long-term source of finance
- Dividend payable is normally higher than the debenture interest
- When the company is liquidated they gets the right on assets
- Par value of preference shares
- Fixed-rate of dividend are disregarding the volume of profit gained
- Preventative right of preference shareholders
- They bears some characteristics of debentures so they get the hybrid security of preference shares
- Dividends are not tax-deductible expenditure
- The preferential right to receive dividends are also enjoyed by shareholders
Types of Preference Shares
There are various types of preference shares consistent with the clause contained within the agreement at the time of issue, some important kinds are listed below:
- As Per Convertibility:
According to convertibility, there are two types of preference shares:
- Convertible Preference Shares:
The holders of convertible preference shares are given an choice to convert whole or a part of their holding into equity shares after a selected period of your time.
- Non-convertible Preference Shares:
The holder of non-convertible preference shares do not Have the option to convert their holding into equity shares i.e. they remain as preference share till their redemption.
- As Per Redemption:
Under this category, the preference shares is assessed into following two categories.
- Redeemable Preference Shares:
Redeemable preference shares are those shares which are redeemed or repaid after the expiry of a specify period. As per the company (Amendment) Act, 1988, a company can issue redeemable preference shares which are redeemable within 10 years from the date of issue.
- Irredeemable Preference Shares:
Irredeemable preference shares are those shares which are not redeemed before a specify period. It does not have a specific maturity date. At the time of liquidation of the company such shares are redeemed. As per the companies (Amendment) Act 1988, a company at present cannot issue irredeemable preference shares.
- As Per Dividend:
Under this category, the preference shares are classified under two heads:
- Cumulative Preference Shares:
If the company earns adequate profit, then the preference dividend is payable. However, the accruing preference shares take additional features which allow the preference shareholders to claim unpaid dividends of the years in which dividend could not be paid due to insufficient profit.
- Non-cumulative Preference Shares:
The holders of non-cumulative preference shares will get preference dividend if the company earns enough profit but they don’t have the right to claim unpaid dividend which couldn’t be paid due to insufficient profit.
- As Per Participation:
Under this category the preference shares are of two types
- Participating Preference Shares:
Participating preference shareholders are entitled to shares the surplus profit of the company in addition to preference dividend. By deducting preference dividend and equity dividend from the distributable profit, the surplus profit is calculated . They are also authorize to participate in the surplus assets of the company.
- Non-participating Preference Shares
Non-participating preference shareholders aren’t authorize to share surplus profit and surplus assets like participating preference shareholders.
Advantages of preference shares:
- Appeal to Cautious Investors
- No Obligation for Dividends
- No Interference
- Trading on Equity
- No Charges on Assets
Disadvantages of preference shares:
- Fixed Obligation
- Limited Appeal
- Low Return
- No Voting Rights
- Fear of Redemption