A preference share issue is when a company issues a very large number of shares or convertible bonds to a selected group of people to raise capital.
This procedure is also called the preferential distribution of shares, Under section 81 of the Companies Act 1956, it is neither a share issue nor a public issue.
This method differs from other funding methods in that the entire securities are distributed to pre-identified participants, who may be the current shareholder of the company. These are usually people who are very interested in getting a stake in the company.
The person holding the preference shares has the right to be paid out of the company’s assets before the shareholders if the company goes bankrupt.
Why do companies decide to distribute preference shares?
Preferential allocation is the fastest way for a company to raise capital. This type of distribution is made by the company to provide a route for shareholders who are unable to purchase a larger number of company shares at a reasonable price. Listing.
Which companies can distribute preference shares?
Any private or public company, listed company or listed company, § 8 companies, etc., may distribute preference shares.
What kind of securities are offered on a senior basis?
The Company offers securities such as shares, partially and fully convertible bonds or other securities that can later be converted into shares.
Advantages and disadvantages of the benefit issue
1) When a company earns a profit, preferred shareholders are paid first among other shareholders.
2) If a company goes bankrupt, a fixed price is still paid to the preferred shareholders, which means that the profit of the preferred shareholders is always safe.
3) Preference shares do not incur brokerage costs.
4) Raising money through preferential offers helps a company save time and additional costs compared to a public offer.
5) Unlike bonds, the preference offer does not charge for the company’s assets.
1) Preference shareholders will not be granted voting rights.
2) The preferential shareholder has claims on the company’s assets, which later become an unwanted part of the company.
3) Since no income tax is deducted from the preferential dividend, the company must earn more. Otherwise, the shareholders’ dividend will be affected.
4) Preference share financing is more expensive for the company than bonds.
The company wants to raise funds from the public to meet financial requirements. If the issuance of shares to the public is large-scale, it will take a lot of time and is a relatively complex process. This fundraising method is most convenient because it requires less paperwork.