Question

Explain the features of preference shares.

Answer 1

Meaning: -
Preference shares are those shares which enjoy a preferential right as to the payment of dividend at a fixed rate throughout the lifetime of the company and as to the repayment of capital on winding up of the company. They enjoy preference over equity shares. In short, equity shares are paid only after the claims of preference shares are satisfied.

1. Fixed annual dividends       

2. Return of capital in the event of winding up of the company.

Although the preference shareholders enjoy the above preferences, they do not enjoy normal voting rights. They are entitled to vote only on those matters that affect their interests. The maximum rate of dividend permissible is 14 percent per year. 

Features of Preference shares are as follows:

 

1. Preferential treatment: -
The Preference shareholders get preference for dividend. 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 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’.