The Hierarchy of Preference Shareholders

INTRODUCTION

Raising capital by issue of shares is a most imperative method for raising long-term funds. Those assets can be put invested into long-term or permanent assets like land and building, plant and hardware, furniture and etc. A share is unit of measure of a shareholder’s enthusiasm for the total capital of the company.[1] Share capital of a company is partitioned into countless parts and each part is known is a share. As per Companies Act, a company can issue two sorts of shares – inclination and value. Inclination offers. Section 85(1)[2] of the Companies Act characterizes preference shares as those shares which convey particular rights as the instalment of profit at a settled rate and as to reimbursement of capital if there should arise an occurrence of ending up of the company. Accordingly, both the particular rights viz. (a) preference in installment of profit and (b) preference in repayment of capital in the case of ending up of the company, must append to preference shares. The rate of dividend on these shares is settled and the profit on these shares must be paid before any profit is paid to customary shares. Directors may choose not to pay any dividend to any class of shareholders regardless of the possibility that there are adequate profits.[3] But, if any how, they choose to pay the dividend, preference shareholders will get the need to pay the ordinary shareholders.

TYPES

 CUMULATIVE AND NON-CUMULATIVE PREFERENCE SHARES
Cumulative preference shares appreciate the right to get the dividend falling behind financially for the years in which company earned no profits or insufficient profits, in the year in which company gains profits. In other words, dividend on these shares will continue amassing until it is paid in full the arrears before any dividend, before any profit is paid on value shareholders. In the case of non- cumulative preference shares dividend does not gather and therefore, no arrears of dividend will be paid in the year of profits.[4] If company does not have any profits in a year, no dividend will be paid to non-cumulative preference shareholders.[5]

REDEEMABLE AND IRREDEEMABLE PREFERENCE SHARES     

Redeemable preference shares can be reclaimed on or after a period fixed for recovery under the terms of issue or subsequent to giving a proper notice of redemption to preference shareholders.[6] The Companies Act imposes certain limitations for the recovery of preference shares. Irredeemable preference shares are those shares which can’t be redeemed amid the lifetime of the company.

CONVERTIBLE AND NON-CONVERTIBLE PREFERENCE SHARES

Where the preference shareholders are given a right to convert their holding into normal shares, inside a specified period, such shares as known as convertible preference shares. The holders of non-convertible preference shares does not have such right of conversion.[7]

PARTICIPATING AND NON-PARTICIPATING PREFERENCE SHARES

The holders of participating preference shares have a privilege to take an interest in the surplus profits of the company stayed in the wake of paying dividend to the ordinary shareholders and preference shareholders at a fixed rate. The preference shares which don’t have such right to participate in surplus profits are known as non-participating an interest preference shares.[8]

ADVANTAGES OF PREFERENCE SHARES

 FIXED RETURN

The dividend payable on shares is fixed that is usually lower than that payable on equity shares. Thus they help the company in maximizing the profits available for profit to equity shareholders.[9]

 NO VOTING RIGHT

 There are no voting rights for the preference share holders under the matters which are not directly affected with their rights. As a result the promoters order management retains control over the affairs of the company.[10]

 

NO BURDEN OF FINANCE

When the preference shares are issued there is no burden of finance and the company. As the divisions for only played if the profits are available and if they are not available then no dividends will be paid.

FLEXIBILITY           

For maintaining the flexibility in the capital structure of the company can issue redeemable preference shares which can be redeemed under terms of issue.

WIDEN CAPITAL MARKET

When the preference shares are issued it widens the scope of capital market because the safety is provided to the investors at a fixed rate of return. As a result of the preference shares are not issued but capital will not be attracted from moderate type of investors

REGULAR FIXED INCOME

The investors of cumulative preference shares get sir fixed rate of dividend on the preference shares on the regular basis even if there is no profit earned.

PREFERENCE RIGHTS

The preference share carries preferential rights with regard to the payment of dividend and winding up of the company in repayment of capital and enjoys minimum risk.

FAIR SECURITY

The preference shares act as fair securities when the company is going through the depression period. The investors in the start-up companies go for the preference shares. This is done to reduce the risk that the investors take while investing in the early stage companies.[11]

 

[1] Meaning, definition and classification of preference shares , , http://www.caclubindia.com/forum/meaning-definition-and-classification-of-preference-shares-192002.asp (last visited Apr 16, 2017).

[2]  Every company shall keep at its registered office a register of charges in such form and in such manner as may be prescribed, which shall include therein all charges and floating charges affecting any property or assets of the company or any of its undertakings, indicating in each case such particulars as may be prescribed:
Provided that a copy of the instrument creating the charge shall also be kept at the registered office of the company along with the register of charges.

[3] Supra note 1.

[4] Section 85 of Companies Act, 2013, , http://www.companiesact.org/2016/04/section-85-of-companies-act-2013.html (last visited Apr 16, 2017).

[5] Preference Shares, https://blog.ipleaders.in/preference-shares/ (last visited Apr 16, 2017).

[6] Balaram Bora Sr., Preference Shares Role in Indian Companies (2015), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2595036 (last visited Apr 16, 2017).

[7] Supra note 5.

[8] Smriti Chand , Preference Shares: Definition, Advantage and Disadvantage, http://www.yourarticlelibrary.com/share-market/preference-shares-definition-advantage-and-disadvantage/27969/ (last visited Apr 16, 2017).

[9] Fund Raising Efforts of India Inc. To Be Hit By Companies Act, 2013, (2014), file:///C:/Users/USER/Downloads/Fund_raising_efforts_of_India_Inc__to_be_hit_by_Companies_Act__2013.pdf (last visited Apr 16, 2017).

[10] Supra note 8.

[11] Supra note 7.

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