Question

Explain the features of preference shares.

Answer 1

Features of Preference shares are as follows:

1. Preferential treatment: The Preference shareholders get preference for dividends. They enjoy a preference for payment of dividends. They enjoy a Preference for payment of dividends over the equity shareholders.
2. Fixed-rate of Dividend: The Preference shareholders get a regular dividend. The Dividend Rate is fixed. The rate of dividend varies from one company to that of another.
3. Voting Rights: Holders of preference shares do not have normal voting rights like equity shares. However, they can vote on any such matter which is directly affecting their interest as investors
4. Face Value: Compared to the equity share, the face value of Preference shares is high. they are normally issued for a value of Rs. 100/-
5. Preference for Repayment of Capital: The Preference shareholders get Preference in repayment of capital over the equity shareholders at the time of winding up of the company.
6. Redeemability of shares: As per the Companies (Amendment) Act, 1988, a company cannot issue irredeemable preference shares. In other words, preference shares are to be redeemed (paid back) after a certain period of time.
7. Nature of Capital: The Preference shares are to be redeemed after a certain period of time. Therefore, unlike equity shares, they do not provide permanent share capital.
8. Capital Appreciation: The Capital appreciation is low as compared to equity shares of profitable companies.
9. Bonus Shares: Preference Shareholders are not entitled to the issue of bonus shares if issued by the company. They are also not entitled to ‘Right Issue of Shares’.

Answer 2

1. Preference for dividend: Preference shares have the first charge on the distributable amount of annual net profit. The dividend is payable to preference shareholders before it is paid to equity shareholders.
2. Preference for 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.
3. Fixed Return: These shares carry dividend at fixed rate. The rate of dividend is pre-determined at the time of issue. It may be in the form of fixed sum or may be calculated at fixed rate. The preference shareholders are entitled to dividend which can be paid only out of profits. If the directors, in financial crisis, decide not to pay dividend, the preference shareholders have no claim for dividend.
4. Nature of Capital: Preference shares do not provide permanent share capital. They are redeemed after certain period of time. A company can not issue irredeemable preference shares. Preference capital is generally raised at a later stage, when the company gets established. These shares are issued to satisfy the need for additional capital of the company. Preference share capital is safe capital as the rate of dividend and market value does not fluctuate.
5. Market Value: The market value of preference share 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.
6. Voting rights: The preference shares do not have normal voting rights. They do not enjoy right of control on the affairs of the company. They have voting rights on any resolution of the company directly affecting their rights e.g.: Change in terms of repayment of capital, dividend payable to them are in arrears for last two consecutive years, etc.
7. Risk: The investors who are cautious, generally purchase preference shares. Safety of capital and steady return on investment are advantages attached with preference shares. These shares are boon for shareholders during depression period when interest rate is continuously falling.
8. Face Value: Face value of preference shares is relatively higher than equity shares. They are normally issued at a face value of Rs. 100/-.
9. Rights or Bonus Issue: Preference shareholders are not entitled for Rights or Bonus issues.
10. Nature of Investor: Preference shares attract moderate type of investors. Investors who are conservative, cautious, interested in safety of capital and who want steady return on investment generally purchase preference shares.