In this post we are going to discuss about preference shares:
📌 What is preference share ?
📌what are the basic features of preference shares?
📌 Classification of Preference shares
📌 state advantage and disadvantage of it
📌Condition for redemption of Preference shares:
Q: What is preference share ?
Preference shares : section .43 (b) of the companies act 2013 ,defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company .Thus, both the preferential rights i.e:-
(¡) preference in payment of dividend and
(¡¡)preference in the repayment of capital in case of winding up of a company must attach to preference shares.
The rate of dividend on these shares is fixed and the dividend on these shares must be paid before any dividend is paid to ordinary shares .Directors ,however, many decide not to pay any dividend to any class of shareholders even though there are sufficient profits. but, if any how, they decide to pay the dividend ,preparation shareholders will get the priority to pay the ordinary shareholders.
Q: what are the basic features of preference shares?
Following are the basic features of preference shares :
(a) Fixed rate of dividend.
(b) Preferential payment of dividend.
(c) preferential rights in redemption of capital in case of winding up of a company.
(d) Absence of voting rights.
Q:- Classification of Preference shares
Preference shares can also be classified according to the rights attached to them as follows:
(a) cumulative and non- cumulative preferential shares .
(b) Redeemable and Irredeemable Preference shares.
(c) Convertible and non- convertible Preference shares.
(d) participating and non – participating preference shares.
Advantages of Preference shares
1. Helpful in raising loan term capital for a company.
2. There is no need to mortgage property on these shares .
3. Redeemable preference shares have the added advantage of repayment of capital whenever there is surplus in the company.
4. Rate of return is guaranteed.
Disadvantages of preference shares.
1. Permanent burden on the corporate to pay a fixed rate of dividend before paying anything on the other shares .
2. Not advantageous to investors from the point of view of control and management as preference shares do not voting rights.
3. Compared to other fixed interest- bearing securities such as debentures, usually the cost of raising the Preference share capital in higher.
Condition for redemption of Preference shares:
Under section 55 of the companies act 2013, a company need to follow these condition:-
1 No authorization is recommended in the article to redeem the Preference shares of a company.
2. The Redeemable preference shares should be Fully paid up. If there is any partly paid share, it must be converted into fully paid shares before redemption.
3. The Redeemable preference shareholders must be paid out of undistributed profit/ distributable profit or out of fresh of shares for the aim of redemption.
4. If the shares are redeemed at a premium, it must be provided out of securities premium or out of profits of the company.
5. The proceeds from fresh issue of debentures cannot be used for redemption.
6. The amount of capital reserve cannot be utilized for redemption of Preference shares.
7. If the shares are redeemed out of undistributed profit, the nominal value of Share capital, so redeemed must be transferred to capital Redemption reserve account . The is also known as capitalization profit.
8.CRR may be used only for the purpose of issuing fully paid bonus shares to the members.
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