How to buy Preference Shares | Srei Bonds
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Preference Shares

A preference share is an equity security that combines the features of both equity and a debt instrument. For this reason, it is generally considered a hybrid instrument. The term ‘preference’ is with respect to payment of profits and sale, implying that dividends/ profits and proceeds from the sale of company assets are disbursed first to the preference shareholders, since they are given preference over equity shareholders. Preference shares can be convertible (into ordinary shares) as well as non-convertible. The following table outlines the differences between preference shares and equity shares.

Basis
Preference Shares
Equity Shares
Classification
Preference shares are classified into many types like cumulative preference shares, non-cumulative preference shares, convertible preference shares, non-convertible preference shares, participating preference shares, non-participating preference shares, redeemable preference shares and irredeemable preference shares.
Have no classification
Dividend
Rate of dividend is fixed
Rate of dividend is not fixed
Return of Capital
Paid first
Paid after the preference shareholders
Right of Dividend
Paid first
Paid after the Preference Shareholders

Benefits Of Preference Shares

  • Holders of Preference Shares have a first claim on the profits of the Company and any potential proceeds from the sale of an asset of the Company, if the Company was to enter bankruptcy.
  • Preference Shareholders have a priority over ordinary shareholders and they must be paid in full before ordinary shareholders can receive any dividends from the Company.

Guidelines For Issue Of Preference Shares

  • Articles of association of the company provides for the issue of preference shares.
  • Can be issued up to a period of 20 years
  • Can be redeemed only out of the distributable profits of the company or out of the proceeds of a fresh issue of shares
  • The minimum application size for each investor should not be less than Rs.10,00,000
  • Issuing company must obtain at least “AA-“rating from a credit rating agency
  • Public issuance of such shares would require minimum three-year tenure.

Investment Procedure For Preference Shares

Transactions for purchase and sale can be made online or offline. In both the cases a demat account is mandatory. In both the cases, transactions have to be done via a broker registered with the concerned stock exchange.

  • Online, by giving online orders to the broker.
  • Offline, by giving offline orders to the broker.

For online trading an investor must:

  • Open a demat account with a broker or a bank.
  • Open a savings/current account with a bank with Internet banking (with transactions) facility
  • Open a Trading Account with a broker. A broker offers a trading account and arranges to link the bank accounts and demat account with the trading account. Trading may be done offline with the broker. If the broker offers an online trading platform, then it may be also done online.

Faqs (Frequently Asked Questions) For Preferrence Shares

Q1. What are the modes of purchasing preference share?

A1. Preference shares can be purchased in 2 ways:

  • Through Primary Market
  • Through Secondary Market
    • Online trading
    • Offline trading

Q2. What is the minimum amount of investment required?

A2. The minimum amount is as follows:

  • Rs. 10,00,000 for Private placement
  • Rs. 10 for Public Issue

Q3. How is the preference dividend paid?

A3. The amount of dividend can be paid by the issuer either, in cash or cheque, by crediting the amount to the investor’s bank account.

Q4. When can the Preference share be redeemed?

A4. Redeemable Preference Shares are redeemed on a fixed redemption date.

Q5. Why are preference shares issued by a company?

A5. A company issues preference shares in order to raise capital.

Q6. What are the types of preference shares available?

A6. The different types are as follows:

  • Cumulative preference shares

    In case the company has not been able to pay part or all of the annual dividends because of insufficient profit, the unpaid amount is carried forward to future years and made good when the company has sufficient profit to pay the dividends.

  • Non-Cumulative preference shares

    In case the company has not been able to pay part or all of the annual dividends because of insufficient profit, preference shareholders lose the unpaid amount.

  • Redeemable preference shares

    These are preference shares that the company will buy back at an agreed date in the future. They are classified as non-current liabilities in the statement of financial position of a company.

  • Irredeemable preference shares

    These are preference shares that will not be bought back by the company. Shareholders will continue to earn dividends as long as profit is earned. They are listed under heading equity in the statement of financial position of a company.

  • Participating preference shares

    In addition to a fixed rate of dividend, holders of participating preference shares are also entitled to participate in the distribution of dividends with ordinary shareholders.

Q7. Are there any risks associated with preference shares?

A7. Yes. As the income is fixed, the preference share price may fluctuate with interest rates and inflation.

Q8. Can the Preference shares be traded?

A8. The trading of a preference share is done similarly as the common stock.

Q9. Which law regulates the issuance of Preference shares?

A9. The Preference Shares (Regulation of Dividends) Act, 1960

Q10. Which is the best type of Preference share?

A10. Convertible Preference Shares are the best Preference shares to invest in. These shares are corporate fixed-income securities that the investor can choose to turn into a certain number of shares of the company's common stock after a predetermined time span or on a specific date. The fixed-income component offers a steady income stream and some protection of the investors' capital.

Q11. How can the investor track its stock’s performance?

A11. The most effective way to view the performance of the invested stock is by tracking the stock price movement as is indicated in the exchanges where the stock is listed.