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SAI INTERNATIONAL SCHOOL
CLASS-XI

SUB: Business Studies
Chapter 7: Sources of Business Finance
Topic: Preference Shares

(LESSON NOTES - 31)

Preference Shares:

The capital raised by issue of preference shares is called preference share capital. The preference
shareholders enjoy a preferential position over equity shareholders in two ways:

(i) Receiving a fixed rate of dividend, out of the net profits of the company, before any dividend

is declared for equity shareholders; and

(ii) Receiving their capital after the claims of the company’s creditors have been settled, at the
time of liquidation. In other words, as compared to the equity shareholders, the preference

shareholders have a preferential claim over dividend and repayment of capital. Preference shares
resemble debentures as they bear fixed rate of return. Also as the dividend is payable only at the

discretion of the directors and only out of profit after tax, to that extent, these resemble equity
shares.

Thus, preference shares have some characteristics of both equity shares and debentures.

Preference shareholders generally do not enjoy any voting rights.

Features of Preference Shares:

Preference share have the following features:

1. Preference shares are long-term source of finance.

2. The dividend payable on preference shares is generally higher than debenture interest.

3. Preference shareholders get fixed rate of dividend irrespective of the volume of profit.

4. It is known as hybrid security because it also bears some characteristics of debentures.

5. Preference dividend is not tax deductible expenditure.

6. Preference shareholders do not have any voting rights.