Preference share capital refers to the funds a company raises by issuing preference shares (also called preferred stock). These shares occupy a middle ground between equity and debt, offering investors certain privileges not available to ordinary shareholders—particularly in dividend payments and claims on company assets.
🔑 Key Features of Preference Share Capital
1. Priority in Dividends
Preference shareholders are entitled to fixed dividends before any distribution to ordinary shareholders. This provides them with greater certainty of returns.
2. Priority in Asset Claims
In case of company liquidation, preference shareholders enjoy a higher claim on assets compared to ordinary shareholders, though they remain subordinate to creditors.
3. Fixed Income Nature
Preference shares typically provide fixed dividend payments, making them resemble debt instruments in terms of stability of income.
4. Limited Voting Rights
Generally, preference shareholders do not have voting rights in company decisions, unless special conditions arise—for instance, if dividends remain unpaid for a specified period.
5. Hybrid Character
They combine features of equity (ownership rights) and debt (fixed income), making them a true hybrid financing instrument.
6. No Fixed Liability
Unlike debt, companies are not legally bound to pay dividends if profits are insufficient. Payment remains at the discretion of the board of directors.
7. Varieties of Preference Shares
Different forms exist—such as cumulative, non-cumulative, participating, non-participating, convertible, and non-convertible—each offering distinct rights and benefits to investors.
📌 Why Companies Use Preference Share Capital
For companies, issuing preference shares helps raise long-term funds without immediate dilution of control. For investors, it provides a relatively safer option than ordinary equity, offering a steady stream of income with preferential treatment in both dividends and asset claims.
✅ Key Takeaways
* Preference shares bridge debt and equity, giving investors both ownership rights and stable income.
* Investors enjoy priority in dividends and asset claims, making them less risky than common equity.
* Companies benefit from flexible financing, as dividends are discretionary and not legally binding.
* Various types of preference shares allow customization to meet different investor and corporate needs.
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