Preference Share Capital

Preference Share Capital

What is Preference share?

Preference shares are the share of the company which is issued to raise the capital. Preference Shareholders enjoy Priority, both as regards to the payment of a fixed amount of dividend and also towards repayment of capital on winding up of the company.

Preference share capital is a hybrid form of financing with some characteristics of equity capital and some that of debt capital. It is like an equity because of preference dividend, like equity dividend, is not a tax-deductible payment. It is like a debt capital because of The Fixed rate of dividend.

 

Types of Preference Share Capital

1.    CONVERTIBLE AND NON-CONVERTIBLE Preference Shares.

Convertible Preference Shares are convertible into equity shares as per Terms of agreement.

Non-Convertible Preference Shares are not convertible into equity.

2.    REDEEMABLE AND IRREDEEMABLE Preference Shares.

Redeemable Preference Shares are shares that can be Redeemed as per Terms of agreement.

Irredeemable Preference Shares are shares that do not have maturity date but enjoys all the benefits of the Redeemable Preference share.

3.    PARTICIPATING AND NON-PARTICIPATING Preference Shares.

Participating preference shares are a New type of preference shares which Carries an Additional benefit of participating in Profits of the company apart from the fixed dividend.  The payout may vary as per the agreed upon terms.

4.    CUMULATIVE AND NON-CUMULATIVE Preference Shares.

In Cumulative preference share, The Unpaid Divided amount gets added up and are paid when profit is abundant.

Non-Cumulative Preference shares do not have the same options.

5.    Preference Shares. WITH CALLABLE OPTIONS

These are another innovative preference shares in which the company has an option to buy the share at a predetermined price and on or before a certain date.

6.    ADJUSTABLE RATE PREFERENCE SHARES

These are some of the innovative types of instruments where the rate of dividend is not fixed and is formulated based on some calculations relating to the current interest rates etc.

Advantages and Disadvantages of Preference Shares.

Advantages

▪       No dilution in Earnings Per Share Which Improves Financial Metrics.

▪       Just like Debt It Has Leveraging effect as it carries Fixed Dividend.

▪       No Voting rights to Preference shareholders. Hence reduces the risk 0f Takeover.

They are entitled only to preference dividend. Hence aren’t entitled to surplus profits.

Disadvantages

▪       Preference dividend is not Tax Deductible which increases the cost of preference share than Debt.

▪       Preference dividends are cumulative in nature so they can be deferred. But such deferment also blocks Dividend to be paid to Equity shareholders. This can seriously damage shareholder confidence.


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