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.
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.
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.
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.
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. |
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. |
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.
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).
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.
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.
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.
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.
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. |
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.
Many Indian companies issue preference shares.
For example:
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.