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FEATURES OF PREFERENCE SHARES

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Uma asked about 3 years ago

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 narahari answered almost 3 years ago

The features of preference shares are Fixed rate of dividend Preferential payment of dividend Preferential right in redemption of capital when the company is wound up and Absence of voting rights.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 CA Sandeep Bohra answered almost 3 years ago

> Features of Preference Shares **1. Dividends:** Preference shares have dividend provisions which are cumulative or non- cumulative. Most shares have the cumulative provisions, which mean that any dividend not paid by the company accumulates. Normally, the firm must pay these unpaid dividends prior to the payment of dividends on the common stock.These unpaid dividends are known as dividends in arrears or arrearages. **2. Participating Preference Shares:** Most preference shares are non-participating, meaning that the preference shareholder receives only his stated dividend and no more. The theory is that the preference shareholder has surrendered claim to the residual earnings of his company in return for the right to receive his dividend before dividends are paid to common shareholders. The participating preference shareholder receives stipulated dividend and shares additional earnings with the common shareholders. But this share is usually non-cumulative which confirms the view that preference share does have both protective and profit participating provisions. **3. Voting Rights:** Preference shares do not normally confer voting rights. The basis for not allowing the preference shareholder to vote is that the preference shareholder is in a relatively secure position and, therefore, should have no right to vote except in the special circumstances. In India, for instance, the non- cumulative type qualifies for voting rights if preference dividends have been in arrears for the two financial years preceding the meeting or for any three years during a period of six years (ending with the financial year) preceding the meeting. **4. Par Value:** Most preference shares have a par value. When it does, the dividend rights and call price are usually stated in terms of the par value. However, those rights would be specified even if there were no par value. It seems, therefore, as with equity shares, the preference share that has a par value has no real advantage over preference share that has no par value. **5. Redeemable or Callable Preference Shares:** Typically, preference shares have no maturity date. In this respect it is similar to equity shares. Redeemable or callable preference shares may be retired by the issuing company upon the payment of a definite price stated in the investment. Although the “call price” provides for the payment of a premium, the provision is more advantageous to the corporation than to the investor. When money rates decline, the corporation is likely to call in its preference shares and refinance it at a lower dividend rate. When money rates rise, the value of the preference shares declines so as to produce higher yield, the call price acts as an upper peg or plateau through which the price will break only in a very strong market. Non-callable preference shares and bonds are issued in periods of high interest rates. The issue is barred from redeeming them later in the event of generally falling yields or for a certain period so the investor has important protection against declining income. **6. Sinking Fund Retirement:** Preference share issue is often retired through sinking funds. In these cases, a certain percentage of earnings (above minimum amounts) are allocated for redemption each year. The shares required for sinking fund purposes can be called by lot or purchased in the open market. The owners of preference shares called for sinking fund purposes must seek alternative investments. In this sense, preference sinking funds have unfavourable overtones for these investors. But sinking funds have favourable overtones for the owners of shares that are not retired. Sinking fund requirements reduce preference shares outstanding which will give the remaining shares a strong income position. Hence, dividend payments are more certain. The investment status of preference shares will improve gradually where sinking fund arrangements exist. **7. Preemptive Right:** Common law statute gives shareholders, equity or preference, the right to subscribe to additional issues to maintain their proportionate share of ownership. However, the existence of the preemptive right depends on the law and the provisions of the company’s articles of incorporation. The right is a bit more likely to be waived for preference shares than for equity, particularly if preference shares are non-voting.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 lochan answered about 3 years ago

**FEATURES OF PREFERENCE SHARES** Hi, The features of preference shares are Fixed rate of dividend Preferential payment of dividend Preferential right in redemption of capital when the company is wound up and Absence of voting rights. Thanks

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