- Maturity – As per the Companies (Amendment) Act 1988, preference shares cannot be issued as irredeemable or redeemable after the expiry of a period of ten years from the date of its issue.
- Claims on Income – Preference shareholders have a priority in getting their dividend paid before the equity shareholders.
- Claims on Assets – In the event of winding up of the company, Preference shareholders have a superior claim on the general assets of the company, as compared to the equity shareholders.
- Control – Ordinarily, preference shareholders do not have any voting rights and do not have any say in the management or control of the company. However, under Section 87 of the Companies Act, 1956, preference shareholders can vote on resolutions which directly affect the rights attached to their preference shares. In these situations, preference shareholders voting right is in the same proportion of paid up preference share capital bearing to the total paid up equity capital of the company.
- Hybrid form of security – The preference shares represent a hybrid form of corporate security which combines the features of equity as well as debt financing. It has characteristics of equity shares by providing for dividend out of profits only, not deductible for company tax purposes and company need not mortgage its assets to secure preference share capital. Also, preference shares have the characteristics of constant rate of return like interest, have preference in repayment over equity shareholders and normally do not have voting right.
Following are the three key features of preference shares:
- Preference Shareholders are entitled to a fixed rate of dividend and therefore they are also known as fixed income securities. The dividend can be specified as a percentage of the nominal value or as a fixed amount. They will receive a fixed rate of dividend whether the company has made a huge profit or even a loss. This is different from ordinary shares whereby the ordinary dividend will only be paid if the company makes a profit and declares a dividend.
- Preference shares are comparatively less risky for investors. As such, the investors do not generally entitled to vote in company matters.
- Preference Shareholders are given preference in paying the dividend in case the company is wound up. In other words, they will receive the money first and their accounts will be settled before that of the ordinary shareholders.
