It is a hybrid instrument as it has the characteristics of both debt and equity. It has the preference over dividend from taxed income after interest, and the redemption of capital after specified period or at the time of liquidation. These are less risky to hold, compared to equities, but more risky to debentures. The redeemable preference shares, cumulative preference shares participating preference shares, etc. are different types of preference shares based upon its terms and characteristics. For the preference shareholders, the fixed rate of dividend, preference to capital and dividend at the time of liquidation, accumulation of dividend at the time of insufficient profit or loss making position, etc. are the advantages of preference shares; however, very lesser fixed rate of dividend compared to equity shares and having no right of control over management, etc. are its drawbacks.

A Company issuing preference share may benefit from paying the fixed rate of dividend liability and avoiding the problem of dilution of control, whereas the higher cost of raising capital, accumulation of dividend to the future and non-availability of tax-shield towards profit are some of the limiting factors to consider.

ARES