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

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.

Difference Between Preference Shares and Equity Shares

The table below compares preference shares and equity shares.

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

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.