FINANCIAL MANAGEMENT

TOPIC
Preference Shares and Debentures

PRESENTED BY-
SAMEER PATIL - 31
MEDHA PATKE - 33
ABHINITA POOJARY - 34
VAIDEHI SAKPAL - 35
 OUTLINE
• Introduction to PREFERENCE SHARES
• Features
• Pros and Cons of Preference Shares
• Introduction to DEBENTURES
• Features
• Types of Debentures
• Pros and Cons
• Conclusion
 Introduction to PREFERENCE SHARES
Capital stock which provides a specific dividend that is paid before any
dividends are paid to common stock holders, and which takes precedence over
common stock in the event of a liquidation.
• Like common stock, preference shares represent partial ownership in a
company, although preferred stock shareholders do not enjoy any of the
voting rights of common stockholders. Also unlike common stock, preference
shares pay a fixed dividend that does not fluctuate, although the company
does not have to pay this dividend if it lacks the financial ability to do so.
• The main benefit to owning preference shares are that the investor has a
greater claim on the company's assets than common stockholders. Preferred
shareholders always receive their dividends first and, in the event the
company goes bankrupt, preferred shareholders are paid off before common
stockholders.
FEATURES OF PREFERENCE SHARES
• Corporate Structure
Preferred shares feature senior asset claims above common
shares. This means that preferred shareholders are paid prior to
common shareholders from the proceeds of any asset sales amid
bankruptcy. In terms of dividends, preferred dividends are
cumulative.

Missed dividends on preferred shares must be paid out first

before common shareholders receive any dividend payments.
Preferred stock asset claims, however, are junior to those on
bonds. A corporation is legally obligated to make bond interest
payments, but can pay out dividends at its discretion
 Features contn…..
• Voting Rights
Contrary to common shares, preferred shares
do not feature voting rights. With common
stock, one share translates into one vote..
• The preferred or preference share holders are
provided with several facilities. The prime
facility is regarding the payments of dividends.
At the same time, if the dividends are not paid
by the corporation to the preference share
holders, the amount of the dividend is
credited to the account of the share holder
and is paid to the share holder with the next
year's dividend
Cont…..
• Risks Vs. Rewards
• Preferred shares are relatively safe investments, when compared to shares
of common stock. In exchange for the safety of your investment principal,
however, you must be willing to accept smaller potential returns on
preferred shares.

• Common shares feature junior asset claims to preferred stock, so common

stock returns are more so related to corporate earnings performance.
Earnings and common stock prices will increase significantly over time
when a company is managed well. Because of their relatively low returns,
preferred shares are more susceptible to inflation risks. Inflation erodes
purchasing power on cash, when prices for goods and services increase.
Preferred shares are also subject to interest rate risks.
• Apart from these owner-friendly features of
preference shares, there are some other
features also that may not be in proper
harmony with the shareholders. One of such
feature is the call provision. According to this
provision, the preference share issuing
company or corporation may buy-back the
shares from the market whenever the
situation demands so
 Pros and Cons
• Pros:

Preference shares have the priority over common stocks in the way that their
investors will receive the dividends before the common stock investors. It is
good for investors who are just targeting on dividend yields since the company
will pay them the dividends in full first.

In case of the company bankruptcy, investors of the preference shares will be

paid out in assets before common stockholders.

Price movement of the preference shares will be slow due to low volume
trading. Hence investors will not need to spend too much time focusing on the
price movement.
• Cons:

Keep in mind as well that preference shares may be illiquid as compared to

common shares. You may not be able to buy and sell as quickly as equities
because of the low volume trading for preference shares.

Preference shares are not suitable for investors who are targeting in capital gain.
It is because preference shares tend to give you lower capital gains compared to
normal shares.

The issuer has the right, but no obligation, to redeem the preference shares. In
the event of redemption, the issuer is likely to pay the investor the issue price for
each preference share, plus any dividends payable up to the redemption date.
Please note that investors might suffer some loses if they bought their shares at
a price higher than the issue price in case of redemption.
 Introduction to Debentures
•  A type of debt instrument that is not secured by physical
asset or collateral. 

• Debentures are backed only by the

general creditworthiness and reputation of the issuer. 

• Both corporations and governments frequently issue this

type of bond in order to secure capital. Like other types of
bonds, debentures are documented in an indenture. 
• Debentures (or loan stock) exist as an alternative form of
investing in a company that is more secure than investing
in shares because interest payments must be made by the
company and must be paid before dividends. Dividends,
in contrast to debentures, are paid at the company’s
discretion. Debenture holders also become preferential
creditors if the company which issued the debentures
fails. A disadvantage is that debenture holders have no
share in the company and therefore have no control over
it.
 Features of Debentures
• Debenture is a type of debt instrument issued to anyone who lend money to a company for a
specified term and interest rate. In general, debentures have the following important features:

1) Debenture holders are not the owners of the company. They are considered the creditors of
the corporation or in other words, the company borrow money from them through issuing
debenture.

2) No voting rights. The debenture-holder is not a shareholder and cannot vote in the company's
general meetings.

• 3) Fixed rate of interest. A debenture with a fixed charge has a fixed rate of interest. It can be
presented as "10% Debenture". They are always unsecured and earns a fixed rate of interest but
has no share of the profit.
• 4) Compulsory payment of interest. The interest on
debenture is payable irrespective of whether there are
profits made or not.

• 5) Redeemable and Irredeemable. A redeemable debenture

is the one which is to be repaid within a maturity period,
while Irredeemable or Non-redeemable debentures cannot
be redeemed in the life time of the company and only
repayable upon the liquidation of the corporation.
 Types of Debentures
• Registered Debentures:

• These are those debentures which are

registered in the register of the company. the
names, addresses and particulars of holdings of
debenture holders are entered in a register kept
by the company. ed holders.
• Bearer Debentures:

These are those debentures which are not registered in

the register of the company. Bearer debentures are like a
bearer check. They are payable to the bearer and are
deemed to be negotiable instruments. They are
transferable by mere delivery. No formality of executing a
transfer deed is necessary. When bearer documents are
transferred, stamp duty need not be paid.
• Secured Debentures: These are those debentures which
are secured against the assets of the company which
means if the company is closing down its business, the
assets will be sold and the debenture holders will be paid
their money. The charge or the mortgage may be fixed or
floating and they may be fixed mortgage debentures or
floating mortgage depending upon the nature of charge
under the category of secured debentures.
• Unsecured Debentures:

These are those debentures which are not secured against the assets of the
company which means when the company is closing down its business, the
assets will not be sold to pay off the debenture holders. These debentures
do not create any charge on the assets of the company. There is no security
for repayment of principal amount and payment of interest. The only
security available to such debenture holders is the general solvency of the
company. Therefore the position of these debenture holders at the times
of winding up of the company will be like that of unsecured debentures.
That is they are considered with the ordinary creditors of the company.
• Convertible Debentures:

These are those debentures which can be converted into equity shares. These
debentures have an option to convert them into equity or preference shares at the
stated rate of exchange after a certain period. If the holders exercises the right of
conversion, they cease to be the lender to the company and become the members.

Thus convertible debentures may be referred as debentures which are convertible into
shares at the option of the holders after a specified period. The rate of exchange of
debentures into shares is also decided at the time of issue of debentures.

Prior approval of the shareholders is necessary for the issue of convertible debentures.
It also requires sanction of the Central Government.
• Non-Convertible Debentures: These are those
debentures which cannot be converted either
into equity shares or preference shares. They
may be secured or unsecured. Non-
convertible debentures are normally
redeemed on maturity period which may be
10 or 20 years.
• Redeemable Debentures:

These debentures are issued by the company

for a specific period only. On the expiry of
period, debenture capital is redeemed or paid
back.
• Irredeemable Debentures: These debentures
are issued for an indefinite period which are
also known as perpetual debentures. The
debenture capital is repaid either at the
option of the company by giving prior notice
to that effect or at the winding up of the
company.
 Pros & Cons of Debentures
• PROS-

• 1. Control of company is not surrendered to debenture holders because they do not

have any voting rights.
•
2. Trading on equity is possible as debenture holders get a lower rate of return than
the earnings of the company.

3. Interest on debenture is an allowable expenditure under income tax act, hence

incidence of tax on the company is decreased.

4. Debenture can be redeemed when company has surplus funds.

• CONS-
1. Cost of raising capital through debentures is high of
high stamps duty.

2. Common people cannot buy debenture as they are

of high denominations.

3. They are not meant for companies earning greater

than the rate of interest which they are paying on the
debentures.
Conclusion