shares

Preference Shares
Definition: Preference shares allow an investor to
own a stake at the issuing company with a
condition that whenever the company decides to
pay dividends, the holders of the preference
shares will be the first to be paid.

Description: Dividend payment of the preference
shareholders is fixed and if somehow company
liquefies, the owners of the preference shares will
be the first one to get their money back after the
company has paid back its debt.

PREFERENCE SHARES
Preference shares are a long term source of
finance for a company.
They are neither completely similar to equity
nor equivalent to debt.
The law treats them as shares but they have
elements of both equity shares and debt.
For this reason, they are also called hybrid
financing instruments. These are also known
as preferred stock, preferred shares, or only
preferred in different part of the world.


Features of Preference Shares
1. Fixed Dividends
Preference shares have fixed dividends. Also
preference dividends are not tax deductible.
2. Preference over Equity
Preference share dividend has to be paid before
any dividend payment to ordinary equity shares &
at the time of liquidation also, these shares would
be paid before equity shares.
3. No Share in Earnings
Preference shareholders can not claim on the
residual earnings and residual assets.

4. Fixed Maturity
Like debt, preference shares also have fixed
maturity date.
5. Cumulative dividend
It requires that all past unpaid preference
dividend be paid before any ordinary
dividends are paid.
6. Dividend from PAT
Preference share dividend is paid out of the
profits left after all expenses and even taxes.


Advantages of Preference Shares
Advantages from Company point of view

1. Fixed Return
2. No Voting Right
3. Flexibility in Capital Structure
4. No Charge on Assets
5. Widens Capital Market

Advantages from Investors point of view:

1. Regular Fixed Income
2. Preferential Rights
3. Voting Right for Safety of Interest
4. Lesser Capital Losses
5. Fair Security


Disadvantages of Preference Shares
Disadvantages for companies

1. Higher Rate of Dividend
2. Financial Burden
3. Dilution of Claim over Assets
4. Adverse effect on credit-worthiness
5. Tax disadvantage


Disadvantages for Investors

1. No Voting Right
2. Fixed Income
3. No claim over surplus
4. No Guarantee of Assets


Classification of Preference Share
1.Cumulative and Non-cumulative Preference
shares
In the case of Cumulative preference shares,
dividend in arrears for the years in which
company earned no profits or insufficient
profits receives the dividend in the year in
which company earns profits.
But, If company does not have any profits in a
year, no dividend will be paid to non-
cumulative preference shareholders.
2. Redeemable and Irredeemable Preference Shares
Redeemable preference shares can be redeemed
on or after a fixed period after giving a proper
notice of redemption to preference shareholders.
while Irredeemable preference shares are those
shares which cannot be redeemed during the
lifetime of the company.
3.Convertible and Non-convertible preference
shares
Preference shareholders are given a right to covert
their holding into ordinary shares such shares are
known as convertible preference shares. The
holders of non-convertible preference shares have
no such right of conversion.



4. Participating and Non-participating
Preference Shares
The holders of participating preference shares
have a right to participate in the surplus profits
of the company remained after paying dividend
to the ordinary & preference shareholders at a
fixed rate. The preference shares which do not
have such right to participate in surplus profits,
are known as non-participating preference
shares.

EQUITY SHARES
Equity shares also known as Ordinary shares.
Equity shares represent the ownership position in
a company. The shareholders of equity shares are
the legal owner of the company.
Equity shares are the source of the permanent
capital since they do not have a maturity date.
shareholders are entitled for dividend.
The amount or rate of dividend is not fixed: the
companys board of directors decides it.
An ordinary share is known as variable income
security
Authorized Share Capital represents the maximum
amount of capital, which a company can raise from
shareholders. The portion of the authorized share
capital, which has been offered to shareholders, is
called Issued Share Capital.
Subscribed Share Capital represents that part of
the issued share capital, which has been accepted
by shareholders. The amount of subscribed share
capital actually paid up by shareholders to the
company is called Paid-Up Share Capital.
The companys earnings, which have not been
distributed to shareholders and have been retained
in the business, are called Reserves and Surplus.


1. Maturity:
Equity shares provide permanent capital to the
company and cannot be redeemed during the life time
of the company

2. Claims on Income:
Equity shareholders have a residual claim on the
income of a company. They have a claim on income
left after paying dividend to preference shareholders.

Features of Equity Shares
3. Claim on Assets:
Ordinary shareholders have a residual claim on
the companys assets in the case of liquidation.
4. Right to control:
Ordinary shareholders have the legal power to
elect directors on the board. Ordinary
shareholders are able to control management of
the company through their voting rights and right
to maintain proportionate ownership.

5. Voting rights:
Ordinary shareholders are required to vote for
election of directors and change in the
memorandum of association.
An ordinary share holder has votes equal to the
number of shares held by him.
Shareholders may vote in person or by proxy. A
proxy gives a designated person right to vote on
behalf of a shareholder at the companys annual
general meeting.
6. Pre-emptive Right:
The law grants shareholders the right to purchase
new shares in the same proportion as their
current ownership.
7. Limited Liability:
Ordinary shareholders are the true owners of the
company, but their liability is limited to the
amount of their investment in shares.

Advantages of equity shares

Advantages to company:

1. Long-term and Permanent Capital
2. No Fixed Burden on the company's resources
3. Credit worthiness
4. Risk Capital
5. Dividend Policy




Advantages to Investors:

1. More Income
2. Right to Participate in the Control and
Management
3. Capital profits
4. An Attraction of Persons having Limited
Income

Disadvantages of equity shares

Disadvantages to company

1. Dilution in control
2. Trading on equity not possible
3. Over-capitalization
4. No flexibility in capital structure
5. High cost
6. Speculation


Disadvantages to investors

1. Uncertain and Irregular Income
2. Capital loss During Depression Period
3. Loss on Liquidation



A rights issue is a way in which a company
can sell new shares in order to raise capital.
The law in India requires that the new
ordinary shares must be first issued to the
existing share holder.
RIGHT ISSUE OF EQUITY SHARES
Advantages of Right Issue
1. It gives existing shareholders securities called
"rights", which give the shareholders the right to
purchase new shares at a discount to the market
price.
2. Issue involves less flotation cost as the company
can avoid the underwriting commission.
3. In the case of profitable companies, the issue is
more likely to be successful since the
subscription price is set much below the current
market price.

Disadvantages
Share holders who fail to exercise their rights may
lose in terms of decline in their wealth.
The value of each share will be diluted as a result
of the increased number of shares issued.
Another disadvantage is for those companies
whose share holding is concentrated in the hands
of financial institutions, because of the
conversion of loan into equity. They would prefer
public issue of shares rather than the right issue.