Question

What is a ‘Preference Share’? Describe the different types of preference shares.

Answer 1

Answer:

Explanation:Answer to the first part of the question

Preference shares are those shares which have special or priority rights. Preference shareholders have the first right on dividend(if any declared) which is based at a fixed rate before it is paid on equity shares. These shareholders are entitled to get their capital in case of winding up of the company before returning of equity capital. These holders of these shares have no voting rights, however they can claim voting rights in case dividends are not paid on cumulative preference shares for 2 years or more and 3 years or more on non-cumulative preference shares.

Answer to the second part of the question

There are different types of Preference Shares . They all have distinct structures. Some are cumulative, non-cumulative, redeemable, irredeemable, participating, non-participating, callable, convertible, non-convertible, adjustable rate preference shares.

CUMULATIVE AND NON-CUMULATIVE PREFERENCE SHARES  

Under Cumulative preference share, the dividends gets accumulated and the holder is entitled to receive the amount before paying to equity shareholders. This applies too during the time of liquidation, where the preference  share capital and accumulated preference dividend  are paid before any payment to equity shareholders.

Under Non-cumulative preference shares, if the dividend is not pay by the company in the current year,  preference shareholder`s claim is forfeited to that extent.

REDEEMABLE AND IRREDEEMABLE PREFERENCE SHARES

Under Redeemable preference shares  the company repays the capital to the preference shareholders but stops paying  the dividend thereon on the maturity date.

Irredeemable preference shares like equity does not come with any maturity date. The only difference is that the dividend on these shares are fixed and they have the first right over the payment of both capital and dividend  above the equity shareholders.  

PARTICIPATING AND NON-PARTICIPATING PREFERENCE SHARES  

Participating preference shareholders receive fixed dividends  from the company as well as enjoy extra benefit of participating in profits, depending upon the terms and conditions defined in the agreement which differ from case to case. On the other hand  preference shares which do not participate are called non participating preference shares.

PREFERENCE SHARES WITH CALLABLE OPTIONS  

Callable preferred share refers to those type of shares where the issuer has the right to redeem or call the stock at the current price after a stated date. Callable preferred stock has certain terms at the time of issue, this includes the call price, the call premium and the date after which the call price can be called. These are all mentioned in the prospectus which cannot be changed in future.

CONVERTIBLE AND NON-CONVERTIBLE PREFERENCE SHARES  

Convertible preference shares have a right or an option through which they are converted into ordinary equity share based on certain agreed terms and conditions.

Non-convertible shares have same features of a preference share but have no such option like convertible shares.

ADJUSTABLE RATE PREFERENCE SHARES  

These shares do not have a fixed the rate of dividend and is derived based on certain calculations connected to the current interest rates etc.

Hope this helps.

Answer 2

Explanation:

“Preference share” which is generally known as preferred stock can be defined as the dividends of stocks of a company that are paid to shareholders who are before the issuance of the ‘common stock dividend’. If the company enters bankruptcy, then the preferred stock holder is entitled to pay the company property before the common stockholder. Most ‘preference shares’ has a fixed dividend, though the common stock is not usually the case.

Different types of preference shares are;

• Preference shares
• Cumulative preference shares
• Redeemable preference shares