Q.What are preference shares?
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Start your 14-day free trial to unlock the full solution →Preference shares carry preferential rights to a fixed-rate dividend and to repayment of capital ahead of equity shareholders, but normally without voting rights. They are of several types: cumulative/non-cumulative, participating/non-participating, convertible/non-convertible, and redeemable/irredeemable.
Meaning: Preference shares are those shares that enjoy preference over equity shares in two respects: (i) payment of dividend at a fixed rate before any dividend is given to equity shareholders, and (ii) repayment of capital before equity capital when the company is wound up. In return for this security, preference shareholders normally do not have voting rights, except on matters directly affecting their interests.
Features:
- Fixed rate of dividend, paid in priority to equity dividend.
- Priority in repayment of capital on winding up.
- Generally no voting rights in ordinary matters.
- Lower risk than equity shares, but also limited return.
Types of preference shares:
- Cumulative preference shares: if the company does not pay the dividend in a year of loss, the unpaid dividend accumulates and is paid later out of future profits before equity dividend.
- Non-cumulative preference shares: dividend is payable only out of the profits of that year; if not declared, it does not accumulate and lapses.
- Participating preference shares: besides the fixed dividend, these shares get a further share in surplus profits (and sometimes surplus assets) along with equity shareholders.
- Non-participating preference shares: these get only the fixed dividend and no additional share in surplus profits.
- Convertible preference shares: these can be converted into equity shares after a specified period, as per the terms of issue. …
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