## Preference Share Capital
### Definition
Special shares that provide priority over equity in two key aspects:
1. Fixed dividend payment
2. Repayment of capital at winding up
### Key Features
- Fixed Rate Dividend — specified in advance
- Priority — over equity in dividend and capital repayment
- Cumulative — unpaid dividends in loss years carried forward
- Hybrid nature — like equity (no tax shield on dividend) + like debt (fixed return)
- Usually redeemable — fixed maturity period
- Convertible option — some may convert to equity (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 profit after equity dividend |
| Non-Participating | Get only fixed dividend; no share in surplus |
| Convertible | Convertible into equity after specified time |
### Advantages vs Disadvantages
Advantages:
- No EPS dilution (unlike equity)
- Fixed cost capital without mandatory interest → safer than debt
- No voting rights → no threat to control (unless dividends unpaid)
- Redeemable → capital returned once self-sufficient
Disadvantages:
- No tax benefit — dividend not tax-deductible (unlike debenture interest)
- Dividend arrears accumulate — cumulative preference creates a mounting obligation
- Equity dividend blocked — cannot declare equity dividend until preference dues are cleared
### Equity vs Preference Shares
| Basis | Equity | Preference |
|---|---|---|
| Dividend | Variable, paid last | Fixed, paid first |
| Voting Rights | Full | None (except on arrears) |
| Risk | Highest | Lower |
| Convertibility | Generally not | May convert to equity |
| Tax on dividend | No shield | No shield |