In this article let us try to
understand preference shares meaning, characteristics of preference shares and
also merits and demerits of preference shares.
Preference Shares
Preference Shares are the shares that
carry fixed rate of dividend and preferential rights in the repayment of the
shares during winding up of the company or business. Preference Shares can be
said as the hybrid of equity shares and debentures since they have the
characteristics of both equity shares and debentures.
Features of Preference Shares
Now let us try to understand the
characteristics or features of preferences shares
§ Preferential Rights in the payment of dividend over ESHs
§ Preferential rights in the repayment of capital while winding up of
business or company over ESHs.
§ Preference Shares have no voting rights in annual general meeting
of the company.
§ Participating Preference Shares have right over the surplus profits
§ Preference Shares have the right over the assets of the company.
§ Preference Shareholders have preemptive rights over the further
issues.
§ Preference Shares are hybrid of equity and debentures as it shows
the characteristics of both.
§ Certain Preference Shares can be converted into equity shares.
§ Preference Shares can be repurchased.
Advantages of Preference Shares
The Merits or advantages of preference
shares are
§ This type of financing helps company or business retain the control
as it doesn’t offer voting rights.
§ The shares doesn’t have the obligation of making dividend payments
if the company doesn’t have enough funds.
§ The company’s management has the right to issue the preference
shares based on their own terms.
§ Issue of preference shares increases the earnings of ESH by
leveraging.
From
Investor’s Point
§ The investors are safe as they have preferential rights on pay back
of investment when the company winds up.
§ The investor receives fixed rate of dividend.
§ Certain preference shares after maturity will be converted into
equity shares.
Disadvantages of Preferences Shares
The
demerits or advantages of preference shares are
§ Preference Shares are not tax deductible thus it is costlier than
debentures.
§ In case the company issues cumulative preference shares then the
company will having huge financial obligation and burden towards cumulative
preference shares as if the company has to pay dividends of the previously
unpaid arrears dividends.
§ PSHs doesn’t have voting rights. Thus they have no control over
business or company.
§ Repayment of preference shares erodes the capital heavily.
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