Preference shares – A brief Note
Preference shares are often referred to as preferred stock. It means they are preferred over other types of shares for payment of Dividend and return of Capital. If the company enlists for bankruptcy, preferred shareholders are entitled to be paid before common shareholders from company assets.
Most of the preferred shares have a fixed dividend, which is a guaranteed return, whereas common equity shares do not have such facility. Typically, preferred shareholders also have no voting rights, but usually, common shareholders do. Preference shares come under four sections: convertible Preference shares, cumulative Preference shares, non-cumulative Preference shares, and participating Preference shares.
Section 55(2) of Companies Act 2013 states that a company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed.
Following are the main difference between Equity Shares and Preference Shares
|Equity Shares means the share in the Ownership of a Company
|Preference Shares are more similar to debt instruments
|The whole or part of the net profit can be shared among equity shareholders, in respect o their shareholding percentage
|Dividend is fixed and no participation in surplus profits
|Equity shareholders has the right to vote in all meetings and assent or dissent all decisions
|Preference Shares has no voting or decision making powers
|Equity Shares are lifetime investments in a company
|After a fixed period, preference shares will redeem by the company and return the investment based on the offer letter
|Equity Shares will get capital, only if anything left in the company at the time of winding up, after paying all liabilities.
|Preference Shares has the preference over equity shares on repayment of capital at the time of winding up.