PREFERENCE SHARES

BySnehal Goyal (1011310) Varun Loyalka (1011311) Savinder Singh (1011309) Sachin Jose (1011308)

Meaning

Preference shares is a special equity security that has properties of both equity and debt. A fixed rate of dividend is paid to preference shareholders. First Preference: Whenever the company has distributable profits dividends are first paid to preference shareholders. Second Preference: Repayment of the capital at the time of liquidation of the Company.

Types of Preference Shares

Cumulative Preference shares: These type of shares are awarded dividends even when there are no divisible profits. Non Cumulative Preference shares: The holders of these shares are awarded dividends only when there are divisible profits. Redeemable Preference Shares: In this type of preference shares the capital can be paid back to shareholder after a certain span of time.

Irredeemable Preference Shares: In this type of preference shares the capital cannot be paid back until the company is liquidated.
Participating Preference shares: The shareholders in this case are allowed to participate in surplus profits of the company i.e. profits after awarding the dividends.

Non-Participating Shares: The shareholders in this case are paid only dividends.
Convertible Preference Shares: The shareholders in this type can convert their stake in equity shares. Non-Convertible Preference Shares: The shareholders in this type

Features

Preference in dividends. Preference in assets at the time of liquidation. Convertible into equity shares. Callable at the option of the corporation. Non-Voting. It is not Deductible as an expense while determining tax liability of the company.

Advantage
To Company

To Shareholders

There is no legal obligation to pay the dividend. It provides long term capital to the company. There is no liability of the company to redeem preference shares during the life time of company. There is no dilution of control as preference shares of non-voting.

It earns a fixed rate of

interest. It is a superior security than equity. Capital is returned at the time of liquidation of the company.

Convertible into equity shares.

Disadvantages
To Company

To Shareholders

May turn an Expensive source of finance as compared to debt.

As it is non voting shareholders have to be on mercy of management. Lower rate of interest compared to equity shareholders. Fluctuations in preference shares in more than that of debentures. No charge on assets of the company.

Becomes a permanent burden.

May affect creditworthiness of the company. Tax disadvantage.