preference shares in india

Share capital of a company is categorized into preference and equity shares. It forms part of net-worth. 

Important terms:
Convertible - owner has a right to convert preference shares into equity shares at a later date. Those which don't carry this option is non-convertible preference shares.

Retractable (also Term Preferred Share) – the owner of the preferred shares have a right, at some period of time, to force the company to buy back their preferred shares.

Cumulative preference shares are preference shares on which the unpaid dividend accumulates as arrears.

Non-cumulative preference shares - if a company does not pay annual dividends then the investor does not have the right to claim any forgone dividends in the future.

Redeemable / Callable – company have the right to force the preferred shares to be sold back to the company at a set price or for an equivalent amount of common shares.

   ->  all rights & limitation are applicable to Public company or a private company which is a subsidiary of a public company. A private company can issue any terms to preference share holders through its Articles of Association. But if the private company goes public then those Preference shares issued with higher rights have to be redeemed or restructured.

Preference shares of a public company carry a preferential right to: 

 i) dividend at a fixed rate or amount,

 ii) repayment of capital in case of winding-up of co. 

iii) limited voting rights, only in such matters which affects them, (equity shareholder controls the co.). It may acquire voting rights in situations where dividend is not paid.

iv) they have to be redeemed within 20 yrs from their issue.


Insolvency Risk: It may be questionable whether any assets remain after all other creditors have been paid to go to the preferred shareholders.

Credit risk involves any change in the financial strength of the company as to its ability to pay dividends and repay principal on maturity.

Rate of dividend payable to a foreign company on preference shares issued by an Indian company cannot exceed 300 basis points over the prime lending rate of the State Bank of India prevailing as on the date of the board meeting on which issue of preference shares was recommended. (FEMA)

The Banking Regulation (Amendment) Bill, 2005, proposes to permit banks to issue preference shares subject to the condition that preference shareholders will not acquire voting rights if the bank defaults in the payment of dividend.

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