PRESENTATION ON

PREFERENCE CAPITAL

PRESENTED BY:-MEHABOOB JOIYA

Preference CapitalPreference capital: the claim of

preference share holders lies between debenture holders and equity holder.

They have lower priority than debenture holders and higher priority than shareholders

features: preference shares can have features which vary along, dividends, call ability, convertibility, redeem ability, participation in surplus profit and assets and voting power

Cumulative dividends: preference share may be cumulative or non-cumulative with respect to dividends

In India generally they carry a cumulative feature with respect to dividends

The unpaid dividends are carried forward and payable when dividend is resumed

Ex. If dividend on a 10% cumulative preferred dividend is not paid for 4 years, a dividend arrear of 40% is payable

Firm cannot declare equity dividend unless preference dividends are paid with arrears

Call ability: preference share issue may contain a call feature by which the issuing company enjoys the right to call the preference shares, wholly or partly at certain price

Convertibility: preference shares may be convertible into equity shares.

The holders enjoy the option of converting into equity shares at a certain ratio during certain period

Ex. Converting preference shares into equity shares in the ratio of 1:5 after 2 years for a period of 3 months

Redeem ability: in India preference shares are redeemable in a period not exceeding 8 years from the date of issue

If the terms of issue so prescribe, they can be redeemed at a premium to their face value

According to Companies Act they can be redeemed only out of accumulated profits or fresh issue of shares of any type

The premium portion if any can be met out of share premium account

The accumulated profit utilised for redemption have to be transferred to ‘capital redemption reserve’

Participation in surplus profits and assets:

Firms may issue participating preference shares which entitles share holders to participate in surplus profits (profits left after preference dividend and equity dividend at certain rates) every year and residual assets (assets left after meeting the claims of preference shareholders) in the event of liquidation according to specific formula

Voting rights: before enactment of Companies Act 1956, firms could issue preference shares carrying voting rights. Not now

Now preference share holder is entitled to vote provided:

1. preference share dividend is in arrears for two years or more in case of cumulative preference shares or

2. preference dividend has not been paid for a period of two or more consecutive preceding years or for an aggregate period of three or more years in the preceding six years ending with expiry of immediate preceding financial year.

The small number of preference shareholders, makes their voting right meaningless and often are helpless, unable to use their voting right effectively