There are certain advantages and disadvantages of preference shares from the company’s point of view.
Advantages of Preference Shares
1. Absence of voting rights:
The preference shareholders do not possess the voting rights in the personal matters of the company. There is thus no interference in general by the preference shareholders, even though they gain more profits and advantages over the common shareholders.
2. Fixed return:
The dividends to be paid to the preference shareholders are fixed as compared to the equity shareholders. The company can thus maximize the profits that are available on the part of preference shareholders.
3. Absence of charge on assets:
Because preference shares have no payment of dividends, no charges are levied on the assets of the company unlike in the case of debentures.
4. Capital structure flexibility:
By means of issuing redeemable preference shares, flexibility in the company’s capital structure can be maintained because redeemable preference shares can be redeemed under the terms of issue.
5. Widening of the capital market:
The scope of a company’s capital market is widened as a result of the issuance of preference shares because of the reason that preference shares provide not only a fixed rate of return but also safety to the investors.
6. Absence of financial burden:
As a result of the issuance of preference shares, because dividends are paid only in the presence or profits; absence of profits means absence of dividends.
Advantages of Preference Shares from the Investor’s Point of View
There are certain advantages of preference shares from the investor’s point of view. The advantages are as follows:
I. Fixed regular income:
The culminative preference share investors even in case of absence of profits for the company get a regular hold of profits. The areas of dividends are generated in the years of profits of the company.
II. Safety of interest voting rights:
Voting rights are exerted by the investors in cases relating to the safety of interests. The interests of the preference shareholders are thus safeguarded.
III. Less capital losses:
The preference shareholders possess the preference rights of the repayment of their capital as a result of which there are less capital losses.
IV. Proper security:
Preference shareholders possess proper security in case of their shares in cases when the company fails to generate profits.
V. Presence of preferential rights:
When it comes to payment of dividend and repayment of capital, preference shareholders enjoy preferential rights.
There are certain disadvantages of preference shares from the investor’s point of view. The advantages are as follows:
VI. Absence of voting rights:
Except in matters directly affecting their interests, the preference shareholders have no rights when it comes to voting on behalf of the company.
VII. Absence of guarantee over assets:
As in the case of debentures, the company provides no guarantee on the assets of the preference shareholders too.
VIII. Fixed income:
There is a fixed income that is generated for the preference shareholders. In cases where the company generates exceptional profits, these are by no means shared with the preference shareholders. It is thus obvious that the preferential shareholders have no claim over the surplus of the company
Disadvantages of Preference Shares
The disadvantages of preference shares, from the point of view of the company are as follows:
1. High rate of dividends:
The Company has to pay higher rates of dividends to the preference shareholders as compared to the common shareholders. Thus the cost of capital of the company is also increased.
2. Dilution of claim over assets:
Because of the very reason that preference shareholders have preferential rights over the company assets in case of winding up of the company, dilution of equity shareholders claim over the assets take place.
3. Tax disadvantages:
In case of preference shareholders, the taxable income of the company is not reduced while in case of common shareholders, the taxable income of the company is reduced.
4. Effect on credit worthiness:
In case of preference shares, the credit worthiness of a company is definitely reduced because preference shareholders possess the right over the personal assets of the company.
5. Increase in financial burden:
Because most of the preference shares issued are culminative, the financial burden on the part of the company increases vehemently. The company also reduces the dividends of the equity shareholders because of the reason that it is essential on the part of the company to pay the dividends to the preference shareholders.