There are different kinds of preference shares with structural variations. Some of these are preference shares that are cumulative, non-cumulative, participating, non-participating, redemptive, irredeemable, convertible, non-convertible, callable, adjustable-rate.
Preference shares are like the senior citizens of the country who usually take preference almost everywhere. Like them, the firm issuing preference shares is needed to pay them a dividend in an investment setting before even offering a penny to shareholders. Even in the case of bankruptcy, the remaining cash is used to pay shareholders of choice for the first time.
Different types of preference shares are seen on the market depending on their different structure, terms of maturity, the extent of participation, nature of dividend payment, etc.
Following are some common types of preference shares:
Convertible and Non-convertible Preference Shares
Convertible preferences shares have an equivalent concept of convertible debentures. These shares have an option or right under which they can be converted into a common equity share on specific agreed terms and conditions. This option is not available for non-convertible but has all the other standard features of Preferred Share.
Redeemable and Irredeemable Preference Shares
A redeemable preference share is widely viewed as a preference share with a maturity date at which the firm will pay preference shareholders a capital amount and withhold the payment of dividends. Irredeemable preference shares differ less than other types of preferences. There is no maturity date to make this instrument equal to equity, except that the dividends of these shares are fixed and they have priority over equity shares in payment of both dividends and assets. Because there is no maturity, they are also considered as share capital of permanent preference.
Participating and Non-participating Preference Shares
Participating preference shares are a specific form of preference shares, which, in addition to the set dividend, is an additional benefit from participating in the company’s profits. The allocation may vary in the case depending on the terms and conditions stated in the contract. Other preference shares are called non-participating preference shares. Unless stated, the participation of preference shares is considered non-participation.
Cumulative and Non-Cumulative Preference Shares
Non-payment of preference dividends is not insolvent but does not mean that the liability of the company is lost. If the shares are cumulative preference shares, dividends accrue and are thus paid before equity shareholders pay anything. Even in the case of liquidation, accumulated preference dividends and the preference share capital will be redeemed before making any payments to equity shareholders. Whereas, if a company fails to pay dividends in the current year for non-cumulative preference shares, the preference shareholder’s claim is lost to that extent. Unless preference shares are called non-cumulative, they are assumed to be cumulative in nature.
Preference Shares with Callable options Whenever a company issues preference share long-term fixed-rate dividend shares at that point, the company risks lowering the preference dividend rate on the market. Therefore, with a callable feature, it can issue preference sharing. There is an authority in that company to redeem a preference share between them. Such preference shares will be redeemed at a premium if they are redeemed midway as the investor will incur losses. If the preference dividend rate falls on the market, such an option will be exercised by the company.
