Advantages and Disadvantages of Preference Shares

Advantages of Preference Shares

The following are some of the advantages of Preference Shares.

1. Suitable to Cautious Investors: This is suitable for investors who do not like to take risk and who like to get fixed dividend.

2. Retention of Control: The existing shareholders can retain their control over the company by issuing preference shares because the preference shareholders can vote only on matters affecting them. So there will be no dilution of control.

3. Attractive Types: Redeemable, convertible and participating preference shares are more attractive. They are very helpful to investors and so they have ready market.

4. Convenience: In case of debentures, generally a charge or mortgage on the assets is created. But the issue of preference shares require no such creation.

5. Increase in Equity Shareholders’ Income: Equity shareholders earn good amount of dividend by way of issuing preference shares.

6. Conversion to Satisfy Legal Requirements: The public deposits of companies which are in excess of the maximum limit fixed by Reserve Bank, can be liquidated by issuing preference shares.

7. Economical: Comparing to equity shares, financing preference shares is less costly. So they can be issued for meeting heavy capital expenditure.

8. Enabling Reconstruction and Re organisation: Whenever a company is reorganized or reconstructed, the Board with the consent of the creditors, can easily convert the debts into preference shares.

9. Increasing the Marketability: The preference shares can be utilized for raising the value of the equity shares and debentures in the open market. Everyone who purchase certain number of equity shares may be provided with certain number of preference shares as bonus.

10. Good Alternative for Debentures: The company having an average annual return but not stable income to provide for regular debenture interest, can issue preference shares as an alternative to the debentures.

Disadvantages of preference Shares

The following are some of the disadvantages of preference shares.

1. Heavy Dividend: Usually, preference shares carry a higher rate of dividend than the rate of interest on debentures.

2. Accumulation of Dividend: The arrears of preference dividend accumulate in case of cumulative preference shares. It is a permanent burden for the company.

3. Costly: Comparing to debentures, financing of preference shares is more costly.

4. No Voting Rights: Since preference shares have no voting rights, the interest of the preference shareholders may be damaged by the equity shareholders.

5. Way to Liquidation: Sometimes, instead of using the available limited cash for productive purpose, the Board may give it to the preference shareholders as dividend. In the long run, this may lead to insolvency.

6. Affecting the Financial Status: The credit worthiness of the company may be affected by existence of preference shares.

7. Time of Redemption: If the Board redeem the preference shares during depression, the preference shareholders will be put to a loss.

8. No Income Tax exemption: Since preference dividend is not deducted for income tax purpose, the company has to earn more. Otherwise, the dividend to equity shareholders will be affected.

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