There are various Types of Preference Shares with differences in their structure. Some of these are cumulative, non-cumulative, participating, non-participating, redeemable, irredeemable, convertible, non-convertible, callable, adjustable rate preference shares.
Preference shares are like senior citizens of a country who normally get preference at almost everywhere. Just like them, in an investment environment, the company issuing preference shares is required to pay a dividend to them before they offer even a penny to equity shareholders. Similar is the situation in the event of bankruptcy, the residual money is used first to pay to the preference shareholders.
Various types of preference shares are seen in the market based on their different structure, maturity terms, an extent of participation, nature of dividend payment etc.
Some of the common types of preference shares are as follows:
Convertible and Non-Convertible Preference Shares
Convertible preference shares have a similar concept of convertible debentures. These shares possess an option or right whereby they can be converted into an ordinary equity share at some agreed terms and conditions. Non-convertible simply does not have this option but has all other normal characteristics of a preference share.
Redeemable and Irredeemable Preference Shares
Redeemable preference share is very commonly seen preference share which has a maturity date on which date the company will repay the capital amount to the preference shareholders and discontinue the dividend payment thereon. Irredeemable preference shares are little different from other types of preference shares. It does not have any maturity date which makes this instrument very similar to equity except that the dividend of these shares is fixed and they enjoy priority in payment of both dividend and capital over the equity shares. Since there is an absence of maturity, they are also known as perpetual preference share capital.
Participating and Non-Participating Preference Shares
Participating preference shares are a unique type of preference shares which has an additional benefit of participating in profits of the company apart from the fixed dividend. The distribution may depend on the terms and conditions mentioned in the agreement which may vary to some extent from case to case.
Cumulative and Non-Cumulative Preference Shares
Nonpayment of preference dividend does not amount to bankruptcy but this does not mean that the liability of the company is lost. If the shares are cumulative preference shares, the dividends are cumulated and therefore paid when the company makes the profit. In short, a dividend of cumulative preference shares will have to be paid as long as the company earns the profit in any year. Whereas, for non-cumulative preference shares, a company can skip the dividend in the year, the company has incurred losses.
Preference Shares with Callable Options
These are another innovative preference shares in which the company has an option to buy the share at a predetermined price and on or before a certain date.
Adjustable Rate Preference Shares
These are some of the innovative types of instruments where the rate of dividend is not fixed and is formulated based on some calculations relating to the