This article throws light upon the top eight characteristics of preference shareholder. The characteristics are: 1. Dividends 2. Right to Vote 3. Right on Assets 4. Par Value 5. Retirement of Debt through Sinking Fund 6. Pre-Emptive Right 7. Convertibility 8. Hybrid.
Characteristic # 1. Dividends:
A preference shareholder has priority over equity shareholders in the payment of dividends but the rate is fixed unlike the common stockholders. Preference shareholders usually get cumulative rate of dividend so that if in one year the company does not pay a dividend it pays in the next year.
These dividends also have a priority over equity shares. Equity share dividends vary from year to year depending on the profits of the company.
Characteristic # 2. Right to Vote:
The preference shareholders in India do not have a right to vote in the annual general meeting of a company and their dividends are usually fixed but in the event of non-payment of dividend for two years or more the preference shareholder can vote. Voting may be, in the form of show of hands or ballot.
Characteristic # 3. Right on Assets:
The preference shareholders have a similar right to that of bondholders on the assets of the firm. At the time of liquidation, the preference shares have a prior right to that of the equity shareholders but the payment and the face value of the preference shareholders are paid only after the rights of the bondholders and other creditors are met.
Their rights, therefore, come last amongst the creditors but before the preference shareholders.
Characteristic # 4. Par Value:
The preference share usually has a par value or face value or denomination by which it is valued. This par value can also be changed by the corporate shareholders. In India, the preference shares have only a par value.
Characteristic # 5. Retirement of Debt through Sinking Fund:
A company usually retires its preference shares with the help of a special fund created for the purpose. This fund is called the sinking fund. A sum of money is annually set apart in this fund and is used to retire the preference shares when they become due. This is specially so in the case of redeemable preference shares. If no right of redemption is given, the preference shares are usually redeemable.
Characteristic # 6. Pre-Emptive Right:
The preference shareholders like the equity shareholders have a right of receiving further issues from the company before it is advertised or offered to the other members of the public. This right gives it a special resemblance to the equity shareholders. It also gives an additional right above the right of the bondholders.
A right to further issues is a chance given to shareholders to receive the benefits of growth of the firm. This makes the value of preference shares higher than that of the bonds. In India, however, the preference shares are not preferred and equity shares continue to be of higher value than both preference stock and bonds.
Characteristic # 7. Convertibility:
The preference shares are usually non-convertible unless otherwise stated in a clause inserted at the time of issuing of these shares. The clause should mention the rights, privileges and the convertibility aspect, the rate of conversion and the number of shares offered at the time of conversion and put in a special legal document with the trustees-in-charge.
The convertibility clause gives the preference shareholders a share in the growth of the company. Also, it is rated at a higher value than non-convertible preference shares.
Characteristic # 8. Hybrid:
The preference, stock is a hybrid between a bond and common stock. As already stated, it resembles both these types of stock. Valued as a bond it has a greater claim on the assets of the firm and is almost in the position of creditors.
As common stockholder, it is entitled to rights of dividend. At the time of liquidation also it has the rights given only after the bondholders are satisfied. These features of a preferred stock give it an added value over bond and stability of income over common stock.
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