## Preference Share Capital
### What is it?
Preference shares give holders priority over equity shareholders in two key aspects:
1. Fixed dividend payment
2. Repayment of capital at winding up
### Key Features
| Feature | Detail |
|---|---|
| Fixed Rate of Dividend | Specified in advance, unlike equity |
| Priority | Over equity in both dividend and capital repayment |
| Cumulative Nature | Unpaid dividend in loss years is carried forward |
| Hybrid Nature | Like equity (no tax shield on dividend) + like debt (fixed return) |
| Redeemable | Usually has a fixed maturity period |
| Convertible Option | May convert into equity after a fixed term (e.g., CCPs) |
| No Voting Rights | Except when dividend remains unpaid |
### Types of Preference Shares
| Type | Feature |
|---|---|
| Cumulative | Arrear dividends accumulate until paid |
| Non-Cumulative | No right to arrears; only current year's dividend |
| Redeemable | Must be repaid at end of fixed period |
| Participating | Share in surplus after equity dividend |
| Non-Participating | Get only fixed dividend; no share in surplus |
| Convertible | Convertible into equity after specified time |
### Advantages
1. No EPS Dilution — unlike equity, doesn't reduce EPS
2. Leverage Benefit — fixed cost capital without mandatory interest payment (safer than debt)
3. No Voting Rights — no threat to management control unless dividends are unpaid
4. Redeemable — capital can be returned once company is self-sufficient
### Disadvantages
1. No Tax Benefit — dividend is not tax-deductible (unlike debenture interest)
2. Dividend Arrears Accumulate — cumulative preference shares can pile up unpaid dividends
3. Equity Dividend Blocked — equity dividend cannot be declared until preference dues are cleared
### Equity vs Preference Shares — Quick Comparison
| Basis | Equity | Preference |
|---|---|---|
| Dividend | Variable, paid last | Fixed, paid first |
| Voting Rights | Full | Limited / None |
| Risk Level | High | Lower |
| Convertibility | Generally No | May be convertible |
| Tax on Dividend | Not deductible | Not deductible |