Answer the following question.
What are preference shares? State it’s features
As the name Indicates, these shares have certain privileges and preferential rights distinct from those attaching to equity shares. The shares which carry the following preferential rights are termed as preference shares.
- A preferential right as to the payment of dividends during the lifetime of the company.
- A preferential right as to the return of capital in the event of winding up of the company.
Features of Preference Shares are as follows:
- Preferential dividend :
The dividend is payable to preference shareholders before anything else is paid to equity shares. The company must assure its preferential right as to payment of dividends during the life of the company.
- Prior repayment of capital :
Preference shareholders have a preference over equity shareholders in respect of the return of capital when the company is liquidated. It saves preference shareholders from capital losses.
- Fixed return :
These shares carry dividends at a fixed rate. The rate of dividend is predetermined. It may be in the form of a fixed sum or may be calculated at a fixed rate. One point must be made clear. The preference shareholders are entitled to a dividend that can be paid only out of profit. Although the rate of dividend is fixed, the directors, in financial prudence, decide that no dividend be paid as there are no profits, the preference shareholders have no claims for the dividend.
- Nature of capital:
Preference shares do not provide permanent share capital. They are redeemed after a certain period of time. As per the Companies (Amendment) Act 1988, a company can not issue irredeemable preference shares.
- Market value :
The market value of preference share does not change as-the rate of dividend payable to them is fixed. Capital appreciation is considered to be low as compared with equity shares.
- Voting right :
The preference shares do not have normal voting rights. They have voting rights in respect of those matters which affect their interests. The preference shares do not enjoy the right of control on the affairs of the company.
- Risk :
The investors who are cautious, generally purchase preference shares. The safety of capital and fixed return on investment are advantages attached to preference shares. They attract a moderate type of investors. These shares are boon for shareholders during the depression period when the interest rate is continuously falling.
- Face Value :
The face value of preference shares is relatively higher than that of equity shares. They are normally issued at a face value of Rs. 100/-.
- Right or Bonus issue :
Preferential shareholders are not entitled to the right or bonus shares.