Preference shares: - are often considered to be a hybrid security since it has many features of both ordinary shares and debenture. It is similar to ordinary share in that (a) the non-payment of dividends does not force the company to insolvency, (b) dividends are not deductible for tax purposes, and (c) in some cases, and it has no fixed maturity date. On the other hand, it is similar to debenture in that (a) dividend rate is fixed (b) preference shareholders do not share in the residual earnings, (c) preference shareholders have claims on Income and assets prior to ordinary shareholders, and (d) they usually do not have voting rights.

Features: - claims on income and assets preference share is a senior security as compared to ordinary share. It has a prior claim on the company’s income in the sense that the company must first pay preference dividend before paying ordinary dividend.

Fixed dividend: - the dividend rate is fixed in the case of preference share, and preference dividends are not tax deductible. The preference dividend rate is expressed as a percentage of the par value. The amount of preference dividend will thus be equal to the dividend rate multi [lied by the par value. Preference share to the dividend rate multiplied by the par value. Preference share is called fixed-income security because it orivudes a constant income to investors.

Cumulative dividends: - most preference shares in India carry a cumulative dividend feature, requiring that all past inlaid preference dividend be paid before any ordinary dividends are paid. This feature is a protective device for preference shareholders.

Redemption: - theoretically both redeemable and perpetual (irredeemable) preference shares can be issued. Perpetual or irredeemable preference share does not have a maturity date. Redeemable preference share has a specified maturity. In practice, redeemable preference shares in India are not often retired in accordance with the stipulation since there are not serious penalties for violation of redemption feature.

Sinking fund: - like in the case of debenture, a sinking fund provision may be created to redeem preference share. The money set aside for this purpose may be used either to purchase preference share in the open market or to buy back (call) the preference share. Sinking funds for preference shares are not common.

Call feature: - the call feature permits the company to buy back preference shares at a stipulated buy-back or call price. Call price may be higher than the par value. Usually, it decreases with the passage of time. The difference between call price and par value of the preference share is called call premium.

Participation feature: - preference shares may in some cases have participation feature which entitles preference shareholders to participate in extraordinary profit earned by the company. This means that a preference shareholder may get dividends amount in excess of the fixed dividend. The formula for determining extra dividend would differ.

Voting rights: - preference shareholders ordinarily do not have any voting rights. They may be entitled to contingent or conditional voting rights. In India, if a preference dividend is outstanding for two or more years in the case of cumulative preference shares, or the preference dividend is outstanding for two or more consecutive preceding years or for a period of three or more year in the preceding six years, preference shareholders can nominate a member on the board of the company.

Convertibility: - preference shares may be convertible or non-convertible. A convertible preference share allows preference shareholders to convert their preference shares, fully or partly, into ordinary shares at a specified price during a given period of time. 

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