Preference Shares, as the name suggests, are special kinds of shares that have a higher priority compared to the Equity Shares and give certain rights to the holders. Another major benefit of preference shares is that they give holders the right to receive the dividend on first priority in the company’s annual profits, according to the manner as prescribed by the company. That means preference shareholders get the dividend before the normal shareholders in the company.
Another major Difference Between Preference Shares and ordinary shares is that the prior gives holders the right to receive a percentage in the proceeds earned from the sale of the company’s assets if and when the company is ever liquidated.
Preference shareholders are deemed as privileged members of the company and are entitled to receive all kinds of dividends before ordinary shareholders.
When Can Preference Shares be Issued?
Preference Shares can only be issued by a company as a part of the authorized share capital of that company. In other words, these shares must represent the sharing of the company’s capital.
How Are Preference Shares Different From Ordinary Shares?
Ordinary shares and preference shares are the two common types of shares that an Indian company can issue, so it’s important to understand the various differences between these two types of shares.
Ordinary Shares Vs Preference Shares
While ordinary shares are common Equity Shares or Preference Shares contain the feature of both equity & debt investments.
Ordinary shares give investors voting rights along with rights to the dividend (profits) & growth. On the other hand, preference shares do not offer such rights in the company.
When it comes to dividend payment, preference shareholders are preferred, after which ordinary shareholders are paid. The rate of dividend in case of preference holders is generally fixed while ordinary holders may receive the dividend on the discretion of the board of directors.
Depending on the type of preference shares, they may be converted or redeemed in the future. Ordinary shares have no such facility.
In case of the liquidity of the company, Preference Shareholders are Paid before ordinary shareholders.
Let’s now discuss the different types of Preference Shares and their significance.
Types of Preference Shares
Depending on the voting rights associated with them, preference shares can be divided into the following types:
- Right to Dividend
Based on the right to dividend, preference shares can be of two types: cumulative or non-cumulative.
In case of cumulative preference shares, the company chooses to accumulate the dividends for a certain period of time, after which they are paid to the preference shareholders along with arrears dividends (if any) of the pending amount. By default, all preference shares all cumulative. In the case of non-cumulative preference shares, the preference shareholders are given the dividend before the ordinary shareholders and at a fixed rate.
- Right to Convert
Depending on the availability of the option to convert preference shares into ordinary shares, there can be two types: convertible and non-convertible preference shares.
As the name suggests, convertible preference shareholders are given the option to convert their preference shares into ordinary shares, usually after a certain period of time. In order to exercise this option, the buyer must make the selection at the time of filling the purchase application. In other words, these shares can be redeemed into equity shares after a specific period of time. On the other hand, non-convertible preference shares may not have the option to convert into equity shares.
- Right to Vote
While ordinary shareholders have the right to vote in the important corporate decisions of the company, preference shareholders usually have no such right to vote in the decision-making process. Such preference shares are called non-participating shares.
However, in some cases, the companies may allow their preference shareholders to participate in the voting process, which is called participating preference shares.
Now, preference shares can also be categorized based on the specific needs of the investors. So, make sure to consider all the factors before selecting the right preference shares for investment.