Preference shares: No longer preferable

The Companies Act, 1956 allows an Indian company to issue either equity or preferential shares. The latter get preferential treatment over equity shares.

Preference shareholders are entitled to a fixed rate of dividend to be paid from the profits of the company and receive their capital contribution if an investee company goes into liquidation.

Preference shares have to be redeemed by the company either by paying off the full amount to the shareholders or by issuing equity shares within 20 years from the date of issue.

Due to these inherent rights, venture capitalists prefer to subscribe to preference shares.

Priti Suri is the proprietor of PSA.