What is preference shares? Explain its features.

Answer: Preference shares are shares which carry preferential rights over equity shares in respect of (a) payment of dividend at a fixed rate and (b) repayment of capital on winding up of the company.

Meaning: According to Section 43 of the Companies Act, 2013, preference share capital is that part of the issued share capital of a company which carries, or would carry, a preferential right with respect to payment of dividend at a fixed amount or rate, and a preferential right with respect to repayment of capital on winding up, before the equity shareholders.

Features of preference shares:

1. Preference as to dividend: they get dividend before any dividend is paid to equity shareholders.
2. Fixed rate of dividend: dividend is paid at a fixed rate, e.g. 9% preference shares; they do not share in extra profits (unless participating).
3. Preference as to repayment of capital: on winding up, their capital is repaid before the equity shareholders.
4. Limited voting rights: they can vote only on resolutions that directly affect their rights. If their dividend remains unpaid for two years or more, they get the right to vote on all resolutions (Section 47).
5. Redeemable: under Section 55, a company cannot issue irredeemable preference shares; they must be redeemed within 20 years from the date of issue (up to 30 years for infrastructure projects, with annual redemption of 10% after the 21st year).
6. Cumulative or non-cumulative: in cumulative preference shares unpaid dividend accumulates and is paid in later years; in non-cumulative shares it lapses.
7. Convertible or non-convertible: they may carry the right to be converted into equity shares after a fixed period.
8. Participating or non-participating: participating preference shares share in surplus profits and surplus assets along with equity shareholders.
9. Moderate risk and return: they suit investors who want a steady income with less risk than equity shares.
10. No charge on assets and no control: they are part of owned capital, so the company need not create a charge on assets, and control remains with equity shareholders.
11. Dividend only out of profits: dividend is not compulsory; it is paid only if there are distributable profits and the Board recommends it.

Thus preference shares combine some features of equity shares (owned capital, dividend from profits) and of debentures (fixed return, priority in repayment).