PREFERENTIAL SHARES

 

PREFERENTIAL SHARES:

• A Preference share is hybrid instrument combining the features of both Equity and a Debt instrument.
• These shares are issued to preferential shareholders or stakeholders with certain exclusive features.

Features of Preference share:

• Preference in the Preferential share signifies that the Preferential shareholders are given preference over equity shareholders. 
• Preferential shareholders have claim on dividend and are given preference over common equity shares in case of liquidation of the company. 
• Preferential shares do not represent ownership / voting rights in a company.
• These shares are not traded in the market. 
• Preferred and common stock will trade at different prices due to their structural differences.
• Preferred stocks aren't as volatile and resemble a fixed income security.
• Generally, the preference shares are not offered to general public but to the promoters or to the Institutions. 

Why Companies prefer Preferential share Route:

If companies want to raise capital without increasing voting rights or foreign investment without raising FDI in management.

Companies can issue four main types of preference shares:

1. Convertible Preferential shares
2. Non-convertible Preferential shares.
3. Cumulative Preferential shares
4. Non -Cumulative Preferential shares

Convertible Preferential shares:

     Those Preferential shares which can be converted into ordinary shares after a fixed period of time.

     Non -Convertible Preferential Shares:

     Those Preferential shares which can not be converted into ordinary shares.

        CUMULATIVE PREFERENCE SHARES:

   Preference shares having the characteristics of payment of profits being cumulated in case dividend is not paid by the company for a particular period.

Non -Cumulative Preferential shares:

   Preference shares when the payment of dividend is not being cumulated in case dividend is not paid by the company for a particular period.