What is a preference share?

Preference shares - Meaning

These shares are preferred over equity shares for payment of dividends. The preference shareholders will be the first to receive dividends if the company decides or distributes dividends.

Let's study more on Preference shares.

Preference shares are shares that have preferential rights to receive dividends throughout the life of the company as well as to be eligible for capital repayment upon winding up. Preference shares have a fixed percentage of dividend, i.e. The fixed dividend is paid first to the shareholders, before any other dividends are paid.

Preference shares can be used to finance hybrid projects. They combine the best of both equity shares and debentures. Preference shareholders have preferential rights in regards to receiving dividends as well as getting back capital in the event of a company's winding-up.

Preference shares have these features:

Preference shares can have many features. Corporates may emphasize certain features when issuing preference shares, such as:

• Dividends for preference shareholders
• Preference shareholders are not entitled to vote at an annual general meeting.
• These are a long-term source for finance
• The dividend payable is usually higher than the debenture rate
• When the company is liquidated, assets are automatically transferred to the new owner.
• Par value of preference shares
• Fixed-rate dividend, regardless of volume of profit earned
• Preemptive right for preference shareholders
• Hybrid security of preference share because it also has some characteristics of debentures
• Dividends are not exempt from tax
• Additionally, shareholders have a preferential right to receive dividends

Different types of preference shares

There are many types of preference shares, depending on the clause at issue. These are the most important:

• Cumulative Preference shares:

  Cumulative preference shares are shares that have the right to dividends even when it does not make a profit. If the dividends are not declared by companies for a given year, they are considered arrears and carried forward to the next year. If the arrears related to dividends are cumulative and cleared before any dividend payment is made to equity shareholders, it is referred to as cumulative preference shares.

• Non-cumulative Preference shares:

  Non-cumulative preference shares do not accrue any dividends. If the company does not pay the dividend, they can still receive dividends from the earnings from that year. Dividends are only paid from each year's net profit. If there is no profit for a given year, the arrears in dividends cannot be claimed for subsequent years.

• Participating Preference shares:

  These shares are eligible to receive surplus profits from the company after it has paid other shareholders. Preferential shareholders are entitled to a specified rate of dividend and can also share in additional earnings.

• Participating Preference shares:

  These shares are eligible to receive surplus profits from the company after it has paid other shareholders. Preferential shareholders are entitled to a specified rate of dividend and can also share in additional earnings.

• Non-participating Preference shares:

  Non-participating preference share are preferred shares that do not have the right to take part in surplus profits, or any surplus after liquidation. Preference shareholders are entitled to a stated dividend only.

• Convertible Preference shares:

  These shares can be converted into equity shares at a specific rate upon expiry of a period. Shareholders have the right to convert their shares into stock shares within a given period.

• Non-convertible Preference shares:

  Non-convertible shares are shares that can't be converted into equity. These shares can also be redeemed.

• Redeemable preference shares:

  Redeemable preference shares can be described as shares that are redeemable or eligible to be repaid within the specified time period.

• Non-Redeemable Preference shares:

  Non-redeemable preference shares are shares that can't be redeemed over the life of the company.