by Preference shares, also known as preferred shares, are a type of equity security issued by companies that offer certain preferential rights and privileges to their shareholders. Unlike common shares, preference shares typically have priority over common shares in terms of receiving dividends and in the event of liquidation.
Preference shares often have a fixed dividend rate, which means that the dividend paid to the preference shareholders is a fixed percentage of the face value of the shares. This fixed dividend rate is often higher than the dividend rate paid to common shareholders, which makes preference shares an attractive investment option for those seeking regular income.
Preference shares may also have other features that make them attractive to investors, such as:
- Priority in liquidation: In the event of a company’s liquidation, preference shareholders have priority over common shareholders in receiving their share of the company’s assets.
- No voting rights: Preference shareholders may not have voting rights, which means that they cannot vote on matters related to the company’s management or governance.
- Convertibility: Some preference shares may be convertible into common shares at a later date, which provides investors with the opportunity to benefit from potential capital appreciation.
- Cumulative dividends: Some preference shares may have cumulative dividends, which means that if the company is unable to pay the full dividend in any given year, the unpaid dividends accumulate and must be paid before any dividend can be paid to common shareholders.
Preference shares Types
There are different types of preference shares that companies can issue, which provide different rights and privileges to their holders. Some common types of preference shares include:
- Cumulative preference shares: These shares entitle the shareholder to receive dividends in arrears, in case the company fails to pay dividends in any year. For example, if a company declares a dividend of 5% on cumulative preference shares but is unable to pay the dividend in year one, the unpaid dividend is carried forward to the next year and the shareholder is entitled to receive a dividend of 10% in year two (5% for year two plus 5% for year one).
- Non-cumulative preference shares: These shares do not have the right to receive dividends in arrears. If the company fails to pay dividends in any year, the shareholder has no right to claim the unpaid dividends in future years.
- Participating preference shares: These shares entitle the shareholder to participate in the surplus profits of the company, in addition to receiving a fixed dividend. For example, if the company declares a dividend of 8% on participating preference shares and the company’s profits exceed a certain threshold, the shareholder may be entitled to an additional dividend.
- Non-participating preference shares: These shares do not entitle the shareholder to participate in the surplus profits of the company. The shareholder is only entitled to receive the fixed dividend.
- Convertible preference shares: These shares can be converted into common shares after a certain period of time or under certain conditions. This allows the shareholder to benefit from potential capital appreciation.
- Non-convertible preference shares: These shares cannot be converted into common shares. The shareholder is only entitled to receive the fixed dividend and other preferential rights.
- Redeemable preference shares: These shares can be redeemed or bought back by the company after a certain period of time or under certain conditions. This provides flexibility to the company to restructure its capital base.
Redemption of Preference shares
Redemption of preference shares refers to the process of a company repurchasing or buying back its outstanding preference shares from its shareholders. The redemption of preference shares is a common way for companies to reduce their outstanding equity capital or to restructure their capital base.
It’s important to note that the redemption of preference shares in India is subject to various legal and regulatory requirements, including compliance with the Companies Act, 2013, Securities and Exchange Board of India (SEBI) regulations, and the Income Tax Act, among others. Companies should seek legal and financial advice before proceeding with the redemption of preference shares to ensure compliance with all applicable laws and regulations.
The Companies Act, 2013, governs the redemption of preference shares in India. As per the Act, companies may redeem preference shares either by:
- Paying off the shareholders in cash, or
- Issuing new preference shares in exchange for the redeemed shares.
Process for the redemption of preference shares typically involves the following steps:
- Check the Articles of Association: The Articles of Association of the company should be checked to ensure that they contain provisions relating to the redemption of preference shares.
- Pass Board Resolution: The board of directors of the company should pass a resolution approving the redemption of preference shares. The resolution should specify the number of shares to be redeemed, the price at which the shares will be redeemed, and the terms and conditions of the redemption.
- Provide notice to shareholders: The company should provide notice to its shareholders of its intention to redeem preference shares. The notice should specify the number of shares to be redeemed, the price at which the shares will be redeemed, and the terms and conditions of the redemption.
- Obtain Shareholder Approval: The shareholders should approve the redemption of preference shares at a general meeting of the company. The approval should be obtained by way of an ordinary resolution.
- Redemption of Shares: The company should redeem the preference shares by paying the shareholders in cash or by issuing new preference shares in exchange for the redeemed shares, as per the terms and conditions of the redemption.
- Filing with Registrar of Companies: The company should file the necessary forms and documents with the Registrar of Companies within 30 days of the redemption of preference shares.
