Definition and Requirements Of Preference Shares

Preference shares are also known as preferred stocks. Preferred stocks are a kind of hybrid
instrument with features of both equity as well as debt. Preference shares are entitled to a fixed
dividend and when it comes to dividend payment, it is first paid out to preference shareholders and
then to common shareholders. In the case where the company goes bankrupt, preference
shareholders would be paid out before common stocks but after creditors and bondholders. This is
the reason why preference shares would enjoy a higher dividend than the bonds issued by the
company. Preference shareholders do not have any voting rights like the common stockholders do.
Preference shares are generally given under private placements, that is generally to promoters,
managing directors, certain set of private investors and are rarely available to retail investors.
These can be listed as per the discretion of the issuer.

Earlier researchers from classical and contemporary fuqaha have debated regarding issues relating
to share concepts. Earlier researchers such as Al-Kasani (1993), Al-Khayyat (1989), Nyazee
(2006) and Fahd (2007) have discussed regarding the concept of shares and have examined shares
in musharakah chapter of partnership.1

There are a few differences between musharakah and preference shares. Preferred shares have
debt properties whereas musharakah on the other hand involves profit sharing and loss where
profits will be shared in accordance with the ratio of participating capital contributions as well as
losses incurred in accordance with the contributed capital ratio. In contrast to preference
shareholders, the participants in musharakah are eligible to vote.

1
Ahmad, Shofian, and Bakar, Marina. “The Status of Preference Shares from Islamic Perspective.”International
Journal of Academic Research in Business and Social Sciences Vol. 7, No. 10 (2017): 618.