PREFERENCE SHARES

Preference Share are one type of special shares which has fixed rate of dividend and they posses special rights over equity shares in sharing of profits and also claim over assets of the firm. This is long term source of finance and neither completely similar to equity or debt. It is considered as shares but have feature of Equity and Debt. Sometime this is called “hybrid financing.”

FEATURES OF PREFERENCE SHARES :

Fixed Dividend:  Commonly Debt carries a fixed interest rate, preference shares have fixed dividends attached to them.But the obligation of paying dividend is not so rigid as debt. Non- payment of dividend would not make one as bankrupt in case of preference shares.

Preference over Equity: The shareholder of preference shares will get preference over the equity shareholders in sharing the income as well as claims on assets. Preference Shares dividend have to be paid before any dividend payment to ordinary equity shares. At the time of liquidation these share would be paid before equity shares.

No Voting Rights: Normally Preference Shareholders is not entitled for any voting rights in the company’s meeting. They are considered as debenture holders and don’t have any participation in the management of the company.

No Share in Earnings: Except agreed percentage of dividend and the amount of capital invested, they are not entitled for any earnings. Equity shareholders are the entitled for the remaining earnings and residual assets in case of liquidation where preference shareholders are not entitled.

Fixed Maturity Date: Preference Shares have fixed maturity date. On the date of maturity, the preference capital will have to be repaid to the preference shareholders. Irredeemable preference shares is exception to this. They don’t have any fixed maturity.

TYPES OF PREFERENCE SHARES:

Preference shares  may be classified into  the following major  types:

Cumulative preference shares: Cumulative preference shares  have right  to claim dividends  for those years  which  have no profits.   If the company  is unable  to earn profit  in  any  one  or  more  years,  P. Shares  are  unable  to  get any  dividend  but they  have  right  to  get  the  comparative dividend   for  the  previous   years  if  the company  earned   profit.

Non-cumulative  preference shares: Non-cumulative preference shares  have no right  to  enjoy  the  above  benefits.  They  are  eligible  to  get  only  dividend  if the company earns profit during the years.  Otherwise, they cannot  claim any dividend.

Redeemable  preference  shares:  When,   the  preference shares   have  a  fixed maturity period  it  becomes  redeemable  preference shares.    It  can  be redeemable during the lifetime of the company. The Company Act has provided certain restrictions on  the  return of the  redeemable  preference

Irredeemable Preference Shares: Irredeemable preference shares can be redeemed only when the company goes for liquidator. There  is no fixed maturity period  for such kind  of preference shares.

Participating Preference Shares

Participating preference sharesholders have right to participate extra profits after distributing the  equity  shareholders.

Non-Participating Preference Shares

Non-participating preference sharesholders are  not  having  any  right  to participate extra profits  after  distributing to the  equity  shareholders.  Fixed  rate  of dividend  is payable  to the  type of shareholders.

Convertible Preference Shares

Convertible  preference sharesholders have right to convert  their  holding into equity shares after  a specific period.   The  articles  of association must  authorize the right of conversion.

Non-convertible Preference Shares

There  shares,  cannot  be converted into  equity  shares  from preference shares.

Features of Preference Shares

The  following  are the important features  of the preference shares:

Maturity  period:  Normally   preference shares  have  no  fixed  maturity  period except  in  the  case  of redeemable   preference     Preference shares  can  be redeemable  only  at  the  time  of the  company  liquidation.

Residual claims  on  income:  Preferential sharesholders have a residual  claim on income.    Fixed  rate  of dividend   is  payable  to  the  preference shar

Residual  claims   on  assets:  The  first  preference is  given  to  the  preference shareholders at  the  time  of    If any  extra  Assets  are  available  that should  be  distributed to  equity  shareholder.

Control   of  Management:  Preference  shareholder  does  not  have  any  voting     Hence,  they  cannot  have  control  over  the  management of the  company.

Advantages of Preference Shares

Preference shares  have  the  following  important advantages.

Fixed  dividend: The  dividend   rate  is  fixed  in  the  case  of  preference

It is called as fixed income  security  because  it provides  a constant rate  of income to  the  investors.

Cumulative  dividends:  Preference shares   have  another  advantage   which   is called  cumulative      If the  company  does  not  earn  any  profit  in  any previous   years,  it  can  be  cumulative with  future   period  dividend.

Redemption: Preference Shares  can be redeemable  after  a specific period  except in  the  case  of irredeemable preference  There  is a fixed  maturity period for  repayment of the  initial  investment.

Participation: Participative preference shareholders can participate in the surplus profit  after  distribution to the  equity  share

Convertibility:  Convertibility preference shares  can  be  converted into  equity shares  when  the  articles  of association provide  such  conversion.

Disadvantages of Preference Shares:

Expensive  sources of  finance: Preference shares  have  high  expensive  source of finance  while  compared   to  equity

No  voting  right:   Generally   preference shareholders  do  not  have  any  voting  Hence  they cannot  have the control  over the management of the company.

Fixed dividend only:  Preference shares  can get only fixed rate of  They may  not  enjoy  more  profits  of the  company.

Permanent burden:  Cumulative preference shares  become  a permanent burden so far  as the  payment of dividend  is concerned. Because  the  company  must  pay the  dividend   for  the  unprofitable periods  also.

Taxation:  In  the  taxation point  of  view,  preference shares  dividend   is  not  a deductible  expense  while  calculating  tax.  But,  interest is  a  deductible  expense. Hence,  it  has  disadvantage on  the  tax  deduction point  of view.