Question

Discuss the types of preference shares.

Hint:

Cumulative preference shares offer security in case dividends are missed, while convertible and redeemable preference shares offer more flexibility for the investor.

Answer 1

Preference shares are a type of equity share that gives the shareholder preference over ordinary shareholders in terms of dividends and asset distribution in case of liquidation. There are several types of preference shares:

Cumulative Preference Shares: In the case of cumulative preference shares, if the company fails to pay dividends in a particular year, the unpaid dividends accumulate and must be paid in subsequent years before any dividend is paid to ordinary shareholders.
Non-Cumulative Preference Shares: These shares do not accumulate any unpaid dividends. If the company does not declare a dividend in a given year, the shareholders do not have the right to claim it in the future.
Convertible Preference Shares: These shares can be converted into equity shares of the company at a specified time or under certain conditions.
Redeemable Preference Shares: These shares are repaid by the company at a fixed date or upon the occurrence of a specified event, at a predetermined price.
Participating Preference Shares: These shares allow shareholders to receive additional dividends if the company’s profits exceed a certain limit, in addition to the fixed dividend.
Non-Participating Preference Shares: Holders of these shares are entitled only to a fixed dividend and do not participate in the extra profit-sharing beyond that.

Conclusion: Preference shares offer several benefits to investors, including guaranteed dividends and priority over common shares in case of liquidation. The type of preference share determines the level of participation in the company’s financial performance.