Preference Share Capital

Between the certainty of borrowed capital and the risk of equity capital lies preference share capital, a hybrid source of owned, long-term finance that this AP Intermediate Commerce chapter studies as a distinct category.

A preference share is a share that carries two preferential rights over equity shares: first, a right to receive dividend at a fixed rate before any dividend is paid to equity shareholders, and second, a right to receive the return of capital before equity shareholders in the event the company is wound up. Preference shareholders normally do not enjoy voting rights, except in specified circumstances (such as when their own dividend remains unpaid for a stipulated period, or on a resolution directly affecting their rights).

Several kinds of preference shares are recognised in practice. Cumulative preference shares carry forward any unpaid dividend of a lean year to be paid in a later, profitable year before equity shareholders get anything, whereas non-cumulative preference shares lose the right to that year's dividend altogether if it is not paid. Participating preference shares are entitled, in addition to their fixed dividend, to share in the company's surplus profit along with equity shareholders after a specified rate has been paid to the latter, while non-participating preference shares receive only their fixed rate and nothing more. Convertible preference shares can be converted into equity shares after a specified period, while non-convertible preference shares cannot. Redeemable preference shares must be repaid by the company after a fixed period, while irredeemable preference shares are not repayable during the company's lifetime (though under the Companies Act, 2013, a company cannot issue irredeemable preference shares — all preference shares issued today must be redeemable within a maximum period). …