Question

Explain the disadvantages of preference shares.

Answer 1

1. Fixed Obligation: Dividend on preference shares has to be paid at a fixed rate and before any dividend is paid on equity shares. The burden is greater in case of cumulative preference shares on which accumulated arrears of dividend have to be paid.
2. Limited Appeal: Bold investors do not like preference shares. Cautious and conservative investors prefer debentures and government securities. In order to attract sufficient investors, a company may have to offer a higher rate of dividend on preference shares.
3. Low Return: When the earnings of the company are high, fixed dividend on preference shares becomes unattractive. Preference shareholders generally do not have the right to participate in the prosperity nf the company.
4. No Voting Rights: Preference shares generally do not carry voting rights. As a result, preference shareholders are helpless and have no say in the management and control of the company.
5. Fear of Redemption: The holders of redeemable preference shares might have contributed finance when the company was badly in need of funds. But the company may refund their money whenever the money market is favourable. Despite the fact that they stood by the company in its hour of need, they are shown the door unceremoniously.
6. No Tax Saving: Dividend paid on preference shares is not deductible from profits for computing taxable income.