Preference shareholders have preferential rights and privileges with respect to income and assets over equity shareholders. In respect of dividend, preference shareholders are given preference before dividends are given to equity shareholders. Also in the event of liquidation, preference is given to preference shareholders in repayment of capital before equity shareholders are paid. Since the rate of dividend paid on preference shares is fixed, those who want to have a constant return on their investment, will purchase preference shares.
Preference shares are those shares which carry certain special or priority rights. Firstly, dividend at a fixed rate is payable on these shares before any dividend is paid on equity shares.
Secondly, at the time of winding up of the company, capital is repaid to preference shareholders prior to the return of equity capital. Preference shares do not carry voting rights. However, holders of preference shares may claim voting rights if the dividends are not paid for two years or more on cumulative preference shares and three years or more on non-cumulative preference shares.
Preference shares have the characteristics of both equity shares and debentures. Like equity shares, dividend on preference shares is payable only when there are profits and at the discretion of the Board of Directors.
Preference shares are similar to debentures in the sense that the rate of dividend is fixed and preference shareholders do not generally enjoy voting rights. Therefore, preference shares are a hybrid form of financing.
