Contributed by the preference share holders. They do not carry voting power and the holders of these shares cannot exercise any control on the affairs of the company.
Preference shares have a prior right to fixed dividend form profits and to preferential payments before ordinary shareholders in the event of winding up. Unlike ordinary share capital they have a fixed return.
Classification
(i) Redeemable Preference Shares
Bought back by issuing co. after minimum redemption period but before expiring of maximum redemption period after which they become creditor.
(ii) Irredeemable Preference Shares
Are perpetual preference shares as they will not be redeemed in the company lifetime unless it is under liquidation.
It is permanent.
(ii) Non-participative preference shares
They do not claim any money over and above their par value, but are usually cumulative and redeemable.
(iv) Cumulative preference shares
They can claim arrears before any other shareholders are paid.
(v) Non-cumulative preference shares
Cannot claim interest in arrears.
(vi) Convertible preference shares
They can be converted into ordinary shares
Advantages of Preference Shares
(a) From the view of the issuer
- Obligation to pay a fixed rate of dividend is not binding.
- Voting power is not affected.
- More flexible than debentures if redeemable.
(b) From view point of investor
- Reasonably steady income
- Preference over ordinary shares in liquidation
Disadvantages of preference shares
(a) From view point of the issuer
- Preference dividend not allowable for tax purposes.
- Cost of issue is higher than debentures
(b) From view point of investor
- Returns are limited.
- Yields lower than debentures
- No legally enforceable, right to dividends
- Dividend arrears not paid in full
