Preference Shares

Preference shares are, as their name signals, shares that carry certain preferential rights that ordinary equity shares do not — specifically, a preferential right to receive dividend, at a fixed rate, before any dividend is paid to equity shareholders, and a preferential right to the return of capital ahead of equity shareholders if the company is wound up. Preference shareholders are, in a real sense, co-owners of the company, but they are not its controllers: they normally have no voting rights at all, and gain a vote only on resolutions that directly affect their own class of shares — for instance, a proposal to vary the rights attached to preference shares, or a resolution considered at a meeting where the preference dividend has remained unpaid for the preceding two years or more.

Preference shares are, in effect, the more cautious cousin of an equity share, and their features reflect that: the dividend is fixed in rate at the time of issue (though it is still payable only out of profit, and lapses for a year in which the company has none to distribute); the face value of a preference share is generally higher than that of an equity share, commonly ₹100; and the market value of a preference share stays comparatively stable, since it does not depend on how well the company happens to be doing in a given year, in the way an equity share's market value does. Preference capital is not permanent capital in the way equity capital is — a company is required to fix a period after which preference shares must be redeemed, and, importantly, Section 55(1) of the Companies Act, 2013 does not permit a company to issue irredeemable preference shares at all; every preference share issued today must carry a definite redemption date or event. Preference shareholders are also not entitled to bonus or rights issues, since those privileges belong specifically to the equity shareholders whose fortunes are tied to the company's residual profits. …