1. Preference shares are senior to common equity shares but are junior to other forms of debt in the company’s shareholding table. In their vanilla format, they are like high risk debt securities but with better taxation for investors. They are used very often in convertible formats by Angel investors, Venture Capital firms and Private Equity firm.

2. Preference shares are senior to common equity shares but are junior to other forms of debt in the company’s shareholding table. Preference Shares provide ownership in a company but usually limit the profit to an interest. They usually carry a coupon and have a fixed tenure of life.

3. From a company’s perspective, the obligations of a Preference Share are not as economically binding as the obligations in a debt security. Depending on the jurisdiction, if the company is not profitable in a particular year it is not obligated to pay the coupon of the Preference Share. However the liability of the missed coupon payment moves to the next financial year. If a debt related payment (principal or interest) is missed, then it is a default situation triggering all sorts of punitive measures that give the lender immense power over the future of the company. For this reason the effective yield in a Preference Share is higher than debt because of the higher risk from an investor’s perspective.

4. Investors sometimes prefer to invest in Preference Shares rather than the company’s debt securities because they usually have lower taxation as compared to debt securities.

5. Preference Share sometimes carry a Participation feature. A participation feature provides a Preference Share owner some share in profits too.

6. Preference Shares are also used in convertible formats in complex transactions. Common Equity shares are the most basic form of equity ownership in a company. A Preference Share is therefore sometimes used to convert to certain number of common equity shares subject to certain conditions being met. 

 

Disclaimer: Vitspan does not provide any investment related, tax related or financial advice. The information presented is done so without considering the investment objectives, risk profile, or economic circumstances of any reader or investor. The information presented may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the potential loss of principal. Please consult your financial advisor prior to making investment related decisions.