Preference Shares – What Are Preference Shares & Different Types of Preference Shares in India

By REPAKA PAVAN ADITYA

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Updated on: May 6th, 2025

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5 min read

Preference shares are a special type of share that companies in India issue to raise money. They are like a mix of shares and loans, offering unique benefits to investors. This article explains preference shares, their types, how they work, and why they matter. 

What Are Preference Shares?

Preference shares, also called preferred stocks, are shares that give their owners special rights. If a company decides to pay dividends (a share of profits), preference shareholders get paid first, before regular shareholders. If the company shuts down, these shareholders also get their money back before others. Companies in India issue two types of shares, equity and preference, as per the Companies Act, 2013.

Why Are Preference Shares Important?

Preference shares are important because they offer a safer way to invest. They provide fixed dividends, which means steady income, and priority during tough times, like when a company is closing. This makes them attractive for people who want less risk than regular shares.

How Do Preference Shares Work?

When a company earns profits and decides to share them, preference shareholders get their dividends at a fixed rate first. If the company runs out of money and closes, these shareholders are paid back before equity shareholders. Preference shares must be redeemed (paid back) within 20 years, as required by Indian law.

Types of Preference Shares in India

There are several types of preference shares in India, each with unique features.

Type

Nature

Key Feature

Cumulative Preference Shares

Shareholders get unpaid dividends from loss-making years when profits return.

Guarantees missed dividends are paid later.

Non-Cumulative Preference Shares

Shareholders lose dividends if skipped in a year due to losses.

No carry-forward of unpaid dividends.

Redeemable Preference Shares

Company buys back shares within 20 years.

Also called callable shares.

Irredeemable Preference Shares

Redeemed only when the company shuts down. Not allowed in India.

Not issued in India per Companies Act, 2013.

Convertible Preference Shares

Can be turned into equity shares at a set time and price.

Offers fixed dividends plus growth potential.

Non-Convertible Preference Shares

Cannot be turned into equity shares.

Priority for dividends and repayment but no conversion.

Participating Preference Shares

Shareholders get fixed dividends plus extra if profits are high.

Chance to share in surplus profits.

Non-Participating Preference Shares

Shareholders get only fixed dividends, no extra profits.

No share in surplus profits.

Adjustable-Rate Preference Shares

Dividends change based on market interest rates.

Dividend rate is not fixed.

Callable Preference Shares

Company can buy back shares at a set price and date.

Terms listed in company prospectus.

Difference Between Preference Shares and Equity Shares

The table below compares preference shares and equity shares.

Feature

Preference Shares

Equity Shares

Dividends

Fixed rate, paid first.

Paid after preference shares, not fixed.

Voting Rights

No voting rights.

Have voting rights.

Repayment in Liquidation

Paid back first.

Paid after preference shares.

Redemption

Redeemed within 20 years.

Not redeemed.

Management Role

Cannot participate in management.

Can participate in management.

Mandatory Issuance

Not mandatory for companies.

Mandatory for all companies.

Dividend Accumulation

Cumulative (for some types).

Not cumulative.

Benefits of Investing in Preference Shares

Preference shares offer several advantages:

Steady Income: Fixed dividends provide regular payouts.

Priority: First to get dividends and repayment during liquidation.

Lower Risk: Safer than equity shares because of priority and fixed returns.

Flexibility: Types like convertible shares offer growth potential.

Risks of Preference Shares

While safer than equity shares, preference shares have risks:

No Voting Rights: Shareholders can’t influence company decisions.

Limited Profits: Non-participating shares don’t benefit from extra profits.

Market Risks: Adjustable-rate shares depend on changing interest rates.

Company Performance: If the company struggles, dividends may be skipped (for non-cumulative shares).

Who Should Invest in Preference Shares?

Preference shares are ideal for people who want steady income with lower risk. They suit cautious investors who prefer fixed dividends over the uncertainty of equity shares. Those looking for both safety and some growth potential may choose convertible or participating preference shares.

How to Choose the Right Preference Shares

To pick the best preference shares:

Check Company Performance: Invest in companies with strong profits.

Understand Share Type: Choose cumulative for guaranteed dividends or convertible for growth.

Match Goals: Pick shares that fit your need for income or growth.

Read Terms: Check the company’s prospectus for redemption and dividend details.

How to Buy Preference Shares in India

Preference shares can be bought through:

Company Offerings: Buy directly during a company’s share issuance.

Brokers: Use a stockbroker or online trading platform. Always research the company and share terms before investing.

Are Preference Shares Debt or Equity?

Preference shares are a mix of debt and equity. They act like debt because they offer fixed dividends and must be redeemed, but they are equity because they represent ownership in the company.

Tax on Preference Shares

Aspect

Details

Tax Type

Taxed as “income from other sources.”

Tax Rate

Depends on the investor’s income slab.

TDS

Companies may deduct tax at source on dividends.

Can Anyone Invest in Preference Shares?

Individuals, businesses, or institutions can invest in preference shares. However, they are more suited for those seeking stable income rather than high-risk, high-reward investments.

Examples of Preference Shares in India

Many Indian companies issue preference shares. 

For example:

  • Tata Steel has issued cumulative redeemable preference shares.
  • Reliance Industries offers convertible preference shares for specific projects. Investors can check company announcements or stock exchanges for details.

Conclusion

Preference shares are an excellent option for investors who want steady income with lower risk. With types like cumulative, convertible, and participating shares, there’s something for everyone. By understanding the different types and their benefits, investors can choose shares that match their financial goals. Always research the company and read the terms before investing to make wise choices.

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About the Author
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REPAKA PAVAN ADITYA

Stocks and Mutual Funds Research Analyst
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I manifest my zeal in financial quantitative & quantitative research and have been instrumental in creating a robust process for the evaluation and monitoring of mutual funds. I’m responsible for Equity and Mutual Funds Research while creating instrumental mathematical models for portfolio construction after evaluating funds, and I play an integral role in analyzing changes in mutual funds, micro, and macro-economic indicators, and equity market events and trends. My views on asset classes which are integral in creating an investment strategy for any profile. Read more

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