As the name itself states that preference shares are the ones which are given first preference. Preference shares are of two types. Under the preference share the preference is given for the payment of dividend. Whenever the profits are distributed by the company the difference is first paid on the preference share capital. Others share holders get dividend out of the remaining profits if any. The other preference for the share is given under the repayment of capital at the time of liquidation of the company.
Preference Share Capital is returned after the payment of outside creditors. Equity share holders will only paid money when the preference share capital is paid in full. The equity shares which are issued by the company to the directors and employees of the company are known as sweat equity shares. These are the equity shares which are issued on the discount or for the consideration and making the rights available in the nature.
FEATURES OF PREFERENCE SHARES
Under the preference shares there is a Priority about the payment of dividend and repayment of capital. The rate of dividend under the preference share is fixed. Additional, dividend can be paid to the profits after the payment of equity dividend. The preference share capital will remain with the company on a permanent basis but in the case of redeemable preference shares this is not done. There is no charge over the assets of the company and other preference shares. There is no voting rights hold by the preference shareholders. If there is surplus amount of finance in the company then redeemable shares can be paid off. The dividends on the cumulative preference shares are carried forward to the next year if the company has sufficient profits.
TYPES OF PREFERENCE SHARES
Preference shares are of the following types-
1. Cumulative Preference Shares
Under the cumulative preference shares, the dividend can also be cleaned for those years for which there were no profits.
2. Non Cumulative Preference Shares
Under the non cumulative preference shares, the holders of the shares have no claim for the arrears of dividend. The dividends cannot be claimed in the subsequent years.
3. Redeemable Preference Shares
The capital of a company is only being paid at the time of liquidation. The company cannot return the share capital nor can the shareholder demand its repayment. The company has right to issue redeemable preference shares if the articles of association allow such an issue. After certain period the company has the right to return the redeemable preference shares capital. There are certain restrictions on the return of this capital under the Companies Act. The shares to be redeemed must be fully paid up.
These shares can only be redeemed by the company in the way of profits out or through the fresh issue of capital. Under this the resources of the company are not depleted.
4. Irredeemable Preference Shares
Under the shares can only be redeemed, if the company is liquidated.
5. Participating Preference Shares
Under the participating preference shares the holders participate in the profits of the company. Under this, the fixed rate of dividend is paid first and then a reasonable rate of dividend is paid on equity shares.
6. Non Participating Preference Shares
Under this the shares on which the fixed rate of dividend is paid is known as non participating preference shares
7. Convertible Preference Shares
Under the convertible preference shares by shareholders are given the right to convert their Holdings into equity shares after the specified period.
8. Non-Convertible Preference Shares
Under non convertible preference shares the shareholders are not given the right to get converted into equity shares.
ADVANTAGES OF PREFERENCE SHARES
Under the preference shares the rate of return is guaranteed. The preference shares helps in raising the long term capital for a company. Redeemable Preference Shares gives an advantage to the company for the repayment of the capital whenever there is surplus in the company. Mortgage property does not apply on these shares.
DISADVANTAGES OF PREFERENCE SHARES
- Under the Preference Shares there is always permanent burden of the company for the payment of a fixed rate of dividend before paying anything on other shares.
- There is no advantage to the investors from the control and management point of view as there are no voting rights for the preference shares.
The cost of raising of Preference Shares Capital is higher as compared to the other fixed interest securities such as debentures.
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