- The shares which carry preferential rights are termed preference shares.
- These shares have certain privileges and preferential rights such as payment of dividend, return of capital, etc.
- The preference shareholders are co-owners but not controllers.
- They are cautious investors as they are interested in the safety of the investment.
- They prefer a steady rate of returns on investment.
Features of preference shares:
(i) Preference for dividend:
- They have the first charge on the distributable amount of annual profits.
- The dividend is payable to preference shareholders before anything else is paid to equity shares, but after the settlement of dues of debentures, bonds and loans.
(ii) Prior repayment of capital:
- Preference shareholders have a preference over equity shareholders in respect of return of capital when the company is liquidated.
- It saves preference shareholders from capital losses.
(iii) Fixed return:
- These shares carry dividends at a fixed rate.
- The rate of dividend is predetermined at the time of issue.
- It may be in the form of a fixed sum or may be calculated at a fixed rate.
- The preference shareholders are entitled to dividends which can be paid only out of profit.
- Though the rate of dividend is fixed, the director in the financial crisis of the company may decide that no dividend be paid if there are no profits, the preference shareholders would have no claims for the dividend.
(iv) Nature of capital:
- Preference share capital is safe capital as the rate of dividend and market value do not fluctuate.
- Preference shares do not provide permanent share capital.
- They are redeemed after a certain period of time.
- It is generally issued at a later stage when a company gets established business.
- They are used to satisfy the need for additional capital of the company.
(v) Market value:
- The market value of preference shares does not change as the rate of dividend payable to them is fixed.
- The capital appreciation is considered to be low as compared with equity shares.
(vi) Voting right:
- The preference shares do not have normal voting rights.
- They have voting rights in matters that affect their interests – change of rights in terms of repayment of capital, or dividend payable to them are in arrears for two or more years.
(vii) Risk:
- Cautious investors generally purchase preference shares.
- Safety of capital and fixed return on investment are advantages attached with preference shares.
- These shares are a boon for shareholders during the depression when the interest rate is continuously falling.
(viii) Face value:
- The face value of preference shares is relatively higher than equity shares.
- They are normally issued at a face value of ₹ 100/-
(ix) Right or Bonus issue:
- Preference shareholders are not entitled to bonus or rights issues.
- It can be issued to the equity shares only.
(x) Nature of investor:
- Preference shares attract a moderate type of investors.
- Investors who are conservative, cautious, interested in the safety of capital, expect a steady rate of returns on investment purchase preference shares.
