This document discusses preference shares, which are a type of share issued by companies to raise funds. Preference shares provide a fixed rate of dividend and preferential repayment of capital over other types of shares. The key types of preference shares discussed are cumulative, non-cumulative, redeemable, irredeemable, participating, non-participating, convertible, and non-convertible shares. The document outlines the advantages of preference shares for both companies and investors, as well as some disadvantages, such as preference shares being an expensive source of financing and dividend payments not being tax deductible.

1. PREFERENPREFEREN
CE SHARESCE SHARES

2. INTRODUCTIONINTRODUCTION
• Companies issue different types ofCompanies issue different types of
shares to mop-up funds from variousshares to mop-up funds from various
investors. Before Companies Act,investors. Before Companies Act,
1956, Public companies used to issue1956, Public companies used to issue
three types of shares, i.e. Preferencethree types of shares, i.e. Preference
shares, ordinary shares and deferredshares, ordinary shares and deferred
shares. The Companies Act, 1956 hasshares. The Companies Act, 1956 has
limited the type of shares to only two,limited the type of shares to only two,
i.e.i.e.
• Preference Shares & Equity SharesPreference Shares & Equity Shares

3. MEANINGMEANING
• As the name suggests,As the name suggests,
these shares have somethese shares have some
preferences aspreferences as
compared to other typescompared to other types
of shares. These sharesof shares. These shares
are given two types ofare given two types of
preferences –preferences –
• Payment of DividendPayment of Dividend
• Repayment of capital atRepayment of capital at
the time of liquidationthe time of liquidation

4. • A fixed rate of dividend is paid onA fixed rate of dividend is paid on
preference share capital.preference share capital.
• Preference share holders have no votingPreference share holders have no voting
rights ; so they have no say in therights ; so they have no say in the
management of the company.management of the company.

5. TYPESTYPES
• Preference Shares are of the followingPreference Shares are of the following
types:-types:-
• Cumulative Preference SharesCumulative Preference Shares : These share: These share
holders have a right to claim dividend forholders have a right to claim dividend for
those years also for which there are nothose years also for which there are no
profits.profits.
• Non-Cumulative Preference SharesNon-Cumulative Preference Shares : These: These
share holders are paid dividend if there areshare holders are paid dividend if there are
sufficient profits.sufficient profits.

6. • Redeemable Preference SharesRedeemable Preference Shares :: TheseThese
shares are issued on the terms where theyshares are issued on the terms where they
are liable to be redeemed at either a fixedare liable to be redeemed at either a fixed
time, or the company's option or at thetime, or the company's option or at the
shareholders option. In other words, theshareholders option. In other words, the
company can buy back preference shares atcompany can buy back preference shares at
an agreed time and price.an agreed time and price.
• Irredeemable Preference SharesIrredeemable Preference Shares : Those: Those
shares which cannot be redeemed unlessshares which cannot be redeemed unless
the company is liquidated.the company is liquidated.

7. • Participating PreferenceParticipating Preference
SharesShares :: The holders ofThe holders of
these shares participatethese shares participate
in the surplus profits ofin the surplus profits of
the company.the company.
• Non-ParticipatingNon-Participating
Preference SharesPreference Shares ::
They do not have suchThey do not have such
rights to participate orrights to participate or
claim for a part in theclaim for a part in the
surplus profits of asurplus profits of a
company.company.

8. • Convertible Preference SharesConvertible Preference Shares :: TheThe
holders of these shares may be given a rightholders of these shares may be given a right
to convert their holding into equity sharesto convert their holding into equity shares
after a specific period.after a specific period.
• Non-Convertible Preference Shares :Non-Convertible Preference Shares : ThoseThose
shares which cannot be converted into equityshares which cannot be converted into equity
shares are known as non-convertibleshares are known as non-convertible
preference shares.preference shares.

9. FEATURESFEATURES
• Maturity:-Maturity:- Preference Shares generallyPreference Shares generally
resembles with equity shares in case ofresembles with equity shares in case of
maturity. The company is required to repaymaturity. The company is required to repay
the amount only at the time of liquidation ofthe amount only at the time of liquidation of
the company, after meeting the claim ofthe company, after meeting the claim of
creditors but before paying back the equitycreditors but before paying back the equity
share holders.share holders.

10. • Claims on Income:-Claims on Income:- Whenever the companyWhenever the company
has distributable profit, firstly, a fixed rate ofhas distributable profit, firstly, a fixed rate of
dividend is paid to preference share holders.dividend is paid to preference share holders.
• Claims on Assets:-Claims on Assets:- Usually, the preferenceUsually, the preference
share holders do not have any right in theshare holders do not have any right in the
surplus assets of the company. However,surplus assets of the company. However,
company may issue participating preferencecompany may issue participating preference
shares which entitle its holder to participateshares which entitle its holder to participate
even in the surplus assets of the company ateven in the surplus assets of the company at
the time of liquidation in agreed ratio.the time of liquidation in agreed ratio.

11. • Control:-Control:- Ordinarily, Preference ShareOrdinarily, Preference Share
holders do not have any voting rights, soholders do not have any voting rights, so
they do not have any say in the managementthey do not have any say in the management
or control of the company.or control of the company.

12. ADVANTAGESADVANTAGES
• The company has many advantages byThe company has many advantages by
issuing preference shares, like-issuing preference shares, like-
• No legal obligation to pay dividendNo legal obligation to pay dividend
• Preference Shares provides long term capitalPreference Shares provides long term capital
for the company.for the company.
• No liability to redeem during lifetime ofNo liability to redeem during lifetime of
company.company.

13. • Investors orInvestors or
Shareholders inShareholders in
preference shares enjoypreference shares enjoy
the followingthe following
advantages:advantages:
• Fixed rate of dividendFixed rate of dividend
• Superior security overSuperior security over
equity sharesequity shares
• Preferential rights inPreferential rights in
regard to payment ofregard to payment of
dividenddividend

14. DISADVANTAGESDISADVANTAGES
• The company has following disadvantages :-The company has following disadvantages :-
• It is an expensive source of finance.It is an expensive source of finance.
• Cumulative Preference Shares became aCumulative Preference Shares became a
permanent burden.permanent burden.
• Dividend on preference shares is nonDividend on preference shares is non
deductible expense.deductible expense.

15. • Investors suffers from the followingInvestors suffers from the following
demerits of preference shares:-demerits of preference shares:-
• Preference Shareholders do not have anyPreference Shareholders do not have any
voting right in the management.voting right in the management.
• Rate of dividend is usually lower than equityRate of dividend is usually lower than equity
shares.shares.
• The market prices of preference sharesThe market prices of preference shares
fluctuate much more than that of debenturesfluctuate much more than that of debentures

16. THANKTHANK YOUYOU
!!PresentedPresented
By:-By:-
AbhishekAbhishek
BhatiaBhatia