PREFERENCE SHARE CAPITAL

 Preference Share Capital

 These area special kind of shares; the holders of such shares enjoy priority, both as regards to the payment of a fixed amount of dividend and also towards repayment of capital on winding up of the company. Some of the characteristics of Preference Share Capital are:-

•  Long-term funds from preference shares can be raised through a public issue of shares.
•  Such shares are normally cumulative, i.e., the dividend payable in a year of loss gets carried over to the next year till there are adequate profits to pay the cumulative dividends. 
• The rate of dividend on preference shares is normally higher than the rate of interest on debentures, loans etc. 
•  Most of preference shares these days carry a stipulation of period and the funds have to be repaid at the end of a stipulated period. 
•  Preference share capital is a hybrid form of financing which imbibes within itself some characteristics of equity capital and some attributes of debt capital. It is similar to equity because preference dividend, like equity dividend is not a tax deductible payment. It resembles debt capital because the rate of preference dividend is fixed. 
•  Cumulative Convertible Preference Shares (CCPs) may also be offered, under which the shares would carry a cumulative dividend of specified limit for a period of say three years after which the shares are converted into equity shares. These shares are attractive for projects with a long gestation period. 
•  Preference share capital may be redeemed at a pre decided future date or at an earlier stage inter  out of the profits of the company. This enables the promoters to withdraw their capital from the company which is now self- sufficient, and the withdrawn capital may be reinvested in other profitable ventures.