What Is A Preference Share?
This is a series of explainers to educate and inform new investors. In association with Dun & Bradstreet India as knowledge partner.
Preference Shares: Definition, Meaning & Basics
According to the Companies Act, 2013, Indian firms can issue two types of shares—equity shares and preference shares. Preference shares are those shares which get preferential rights to dividend announced by a company.
This means that a company has to pay dividend to preference shareholders first and then to equity shareholders. In case a company is winding up, the final payment will be made to preference shareholders first and then equity shareholders.
Preference shares are similar to debt instruments in a way that they mostly receive a fixed rate of dividend every year.
Preference shares which can convert into equity shares of a company are called as convertible preferential shares. Some preference shares can also receive arrears of dividend. These are called cumulative preference shares.
In India, preference shares have to be redeemed within 20 years of issuance, and such preference shares are called redeemable preference shares. According to Companies Act, 2013, companies in India cannot issue irredeemable preference shares.
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