Q.What preferential rights are enjoyed by preference shareholders. Explain.

Preference shares get their name from the priority they carry over equity shares in two specific respects. …

What preference shares are: Capital raised by issuing preference shares is preference share capital. These shares have a hybrid character — they resemble debentures (fixed rate of return) and also equity shares (dividend is paid only at the directors' discretion and only out of profit after tax). Preference shareholders generally do not enjoy voting rights, so they do not affect the control of equity shareholders.

The preferential rights — a preference shareholder enjoys a preferential position over an equity shareholder in two respects:

• (i) Preference in dividend: They receive a fixed rate of dividend out of the net profits of the company, and this is paid before any dividend is declared for equity shareholders.
• (ii) Preference in repayment of capital: At the time of liquidation (winding up), their capital is repaid after the creditors' claims are settled but before anything is returned to equity shareholders. …