Understanding the Different Types of Non-Preference Shares
Non-preference shares, also known as ordinary shares, are an essential component in the capital structure of non-approved companies. These shares do not receive a fixed dividend and are not given any special rights, unlike preference shares, which offer specific benefits such as priority in dividend payments. This article will explore the different types of non-preference shares, focusing on non-cumulative preference shares and other notable varieties.
What are Non-Cumulative Preference Shares?
Non-cumulative preference shares (NCPS) are a distinct type of equity that does not accumulate unpaid dividends. Unlike cumulative preference shares (CPS), NCPS do not build up a backlog of unpaid dividends if the company fails to distribute a dividend in a particular year. This means that if the company operates at a loss or opts not to distribute dividends, those specific dividends for the year are forfeited and cannot be claimed later. However, during profitable years, shareholders of NCPS can receive dividends from the profits earned in that year.
Key Characteristics of Non-Cumulative Preference Shares
No Accumulation of Dividends: If the company does not pay dividends, any unpaid dividends become null and void. Dividend Payable from Current Profits: Dividends can only be distributed from the net profit earned in that specific year. Lower Risk: Since dividends are not guaranteed, investors in NCPS take on lower financial risks compared to CPS. No Rights to Past Dividends: If a year's dividend is missed, it cannot be repaid in subsequent years.Types of Preference Shares in India
India boasts a diverse market for preference shares, catering to the varied needs of investors. The major types of preference shares available in the Indian market include the following:
1. Cumulative Preference Shares (CPS)
Cumulative preference shares ensure that any unpaid dividends from a lagging year are carried forward to future years. This guarantees that once a company starts making profits, accumulated dividends must be paid before any dividends can be distributed to ordinary shares. CPS are beneficial for investors who anticipate steady dividend streams and want a measure of financial assurance.
2. Non-Cumulative Preference Shares (NCPS)
As explained earlier, NCPS do not retain unpaid dividends for future distribution and are only paid based on the company's current financial performance. They offer lower risk than cumulative preference shares but also provide lower potential returns.
3. Redeemable Preference Shares (RPS)
These shares are entitled to be redeemed by the issuing company after a specific period, giving investors the assurance that their investment has a definite end date. RPS can be redeemed at par value, a premium, or a discount, depending on the agreement.
4. Irredeemable Preference Shares
Irredeemable preference shares have no fixed redemption date, making them a long-term investment option. These shares typically offer higher dividends compared to other types but come with the risk of indefinite exposure to market fluctuations.
5. Participating Preference Shares
Participating preference shares give shareholders the right to receive dividends and also participate in any profits the company generates above a certain threshold. This is a unique feature that combines the stability of a preference share with the potential for higher returns if the company performs well.
6. Non-Participating Preference Shares
The opposite of participating shares, non-participating preference shares only claim dividends based on a fixed rate and do not participate in any residual profits, making them a safer but less rewarding option.
7. Convertible Preference Shares
Convertible preference shares can be converted into a certain number of ordinary shares of the issuing company with a predetermined price. This feature provides flexibility and the potential for capital appreciation over time.
8. Non-Convertible Preference Shares
These preference shares cannot be converted into ordinary shares, making them a riskier but potentially higher-yielding option.
9. Preference Shares with a Callable Option
Callable preference shares allow the issuing company to redeem the shares at a specified price before the maturity date. This option can be beneficial for issuers during periods of low interest rates or financial stress.
10. Adjustable-Rate Preference Shares
Adjustable-rate preference shares offer dividends that can be adjusted based on changes in market interest rates. This flexibility can attract investors seeking to hedge against interest rate volatility.
In conclusion, non-preference shares, particularly non-cumulative preference shares, and other similar varieties provide investors with a range of options, each with its own set of benefits and risks. Understanding the nuances of these shares can help investors make more informed decisions and align their investments with their financial goals.