Preference Share

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What is Preference Share?

Preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company.

Thus, both the preferential rights viz.

a. preference in the payment of dividend
b. preference in repayment of capital in case of winding up of the company must attach to preference shares.

The rate of dividend on these shares is fixed and the dividend on these shares must be paid before any dividend is paid to ordinary shares.

Types of Preference shares

Preference shares can be of following types

Cumulative and Non-cumulative Preference shares

Cumulative preference shares enjoy the right to receive the dividend in arrears for the years in which the company earned no profits or insufficient profits, in the year in which the company earns profits.

In the case of non-cumulative preference shares dividend does not accumulate and therefore, no arrears of dividend will be paid in the year of profits. If a company does not have any profits in a year, no dividend will be paid to non-cumulative preference shareholders.

Redeemable and Irredeemable Preference Shares

Redeemable preference shares can be redeemed on or after a period fixed for redemption under the terms of issue or after giving proper notice of redemption to preference shareholders.

Convertible and Non-convertible preference shares

Where the preference shareholders are given a right to convert their holding into ordinary shares, within a specified period of time, such shares as known as convertible preference shares. The holders of non-convertible preference shares have no such right of conversion.

Participating and Non-participating Preference Shares

The holders of participating preference shares have a right to participate in the surplus profits of the company remained after paying dividend to the ordinary shareholders and preference shareholders at a fixed rate.

The preference shares which do not have such right to participate in surplus profits, are known as non-participating preference shares.

Advantages of Preference shares financing

  1. Lower cost: The dividend payable on preference shares is fixed that is usually lower than that payable on equity shares. Thus they help the company in maximizing the profits available for a dividend to equity shareholders.

  2. No dilution of control: Preference shareholders have no voting right on matters not directly affecting their right hence promoters or management can retain control over the affairs of the company.

  3. Flexibility in Capital Structure: The Company can maintain flexibility in its capital structure by issuing redeemable preference shares as they can be redeemed under terms of issue.

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