How to sell preference shares in india
Types of Preference Shares (Preferred Stock) - Explained in Hindi | #9 Master Investor
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Namaskar, my name is Mukul and welcome to Asset Yogi.
Friends in the last video we got to know the difference
between common equity shares and preference shares
If you haven't watched that video,
watch that before watching this video
So that you can understand it properly.
You will get the link below in the description.
In that video, we saw that common equity shares holders
mainly get returns in the form of share growth.
The company sometimes declares dividends, sometimes not.
And mostly very few dividends are declared,
if we talk in comparison to share price movement.
On the other side, preference shareholders are given
fixed returns in the form of dividends.
The company says take these returns of 12-14%.
These are always fixed,
Whether share price goes up or down,
or profit goes up or down.
You'll always get these returns.
So mainly it works like bonds.
But now the question arises that if returns are fixed,
is there only one type of preference share?
Are there any standard terms and conditions?
Of course not. Terms and conditions can depend.
There are various types of preference shares.
Like callable preference shares, convertible, perpetual,
fixed maturity date preference shares.
So how many types of preference shares are there?
What things you should consider if you're investing in preference shares?
We'll discuss all these things in this video.
So watch this video till the end.
Let's go straight to the blackboard.
If a company issues preference shares
then how will we know what kind of preference share is this?
For this, you have to read the share certificate. Whichever share
certificate is issued to you, it will have terms and conditions
For example, the first condition you have to look for is
that how much dividend is being promised to you?
So if a 14% dividend is being promised
then what kind of dividend is that?
Are these cumulative or non-cumulative preference shares?
So firstly let's talk about cumulative and non-cumulative.
Let's say the maturity period for preference shares is 10 years,
and the company says you'll get 14% dividends each year.
Let's say in the first year company easily gives 14% dividends.
Business is good and it easily gives in the second year too.
In the third year let's say business is not good and the company is at loss,
and it can't pay your dividends.
So if in the fourth year business is again good,
then they definitely have to give 14% dividends of 4th year,
Plus they have to give 14% of the third year as well.
And let's assume business wasn't good in the fourth year also,
They couldn't pay these dividends.
Then in this case, in the fifth year, they have to give 14%, 14%,
and 14%, so totally they have to pay
3rd, 4th, and 5th year dividends together.
That's what we call cumulative dividends or cumulative preference shares.
So whatever dividends you have, in years company couldn't pay dividends,
all of it adds up and becomes its liability.
On the other side, there are non-cumulative preference shares,
and let's say the maturity period is of 10 years.
Let's take the same example.
In the first two years company easily gives 14%-14% dividends
IF it can't pay in the third year,
Then in the fourth year, its liability is only 14%.
In previous years if it could not pay dividends,
The company has no liability for that. Those won't add.
Assume the business is not good and they can't pay,
then they won't pay. That's it.
If in sixth-year business is good again, then they'll pay 14%.
So it's not like if they couldn't pay dividends in a year,
then it becomes their liability.
That's why we should be careful of what's written in terms and conditions.
Let's look at other types of preference shares.
One is the convertible preference shares.
What do they mean?
If it's written in your share certificate, that
it is convertible after 5 years, that means
company can convert them into ordinary shares after 5 years.
We've already seen the meaning of ordinary and preference
shares in our previous video.
If you haven't watched that video, please watch it.
In which we have talked about preference and equity shares.
So what's different in ordinary shares?
The first thing is the fixed dividend you were getting here,
you won't get that.
Any dividends declared by the company for common shares,
you might get those.
But the main profit of these is that,
ordinary shares get growth in the share price,
which preference shares don't get.
So after 5 years if it converts in an ordinary share,
then it'll get share price growth mainly,
It won't get these fixed dividends.
And if it's a non-convertible preference share,
that means it can't be converted.
It'll be only a preference share for its maturity period.
Let's see other types of preference shares.
One type is redeemable preference shares.
What does redeemable mean?
It's clearly written that it'll be redeemable after 5 years.
That means their maturity date is of 5 years.
After 5 years whatever their issue price was,
company will buy them at that price.
Let's say the issue price was 100 rupees per share.
So after 5 years, you'll get the shares at 100 rupees per share.
So that's the maturity date.
While the non-redeemable shares don't have any maturity date.
Till the company is there.
Let's say the company raised some capital at 100 per share.
But you'll never get that money back.
What will you get back? you'll get 14% dividends per year.
Means whatever dividends are promised to you.
So non-redeemable
preference shares are also called irredeemable,
or perpetual preference shares also.
Now focus here a bit,
In India, non-redeemable preference shares are not allowed.
As per company act 2013
All preference shares must be redeemed within 20 years.
So the maturity date should be less than 20 years.
Besides these, there is callable preference share.
Don't get confused about callable and redeemable,
What does callable mean?
That the company has a call option,
that after a certain time period, the company
can buy back those shares.
Redeemable means it's the maturity date.
The maturity date could be 10 years,
and after 5 years company says we have the call option
Let's say we issued the share at 100 rupees per share.
but after 5 years we'll buy shares from you at 150 RS per share.
The company can buy back those shares,
at a pre-defined date and pre-defined price.
So in a way callable means,
the company can call back those shares from you.
Other than this you get to see adjustable rate preference shares in the market.
Generally, the dividend of 14% is fixed here,
but the company does not want to take interest rate risk.
It does not fix this interest rate,
It links the interest rate. For example,
SBI says they'll give 5% on their MCLR rate.
So the dividend is linked to a rupee interest benchmark rate.
It can be SBI mclr rate or any other rate,
for example, it can be the repo rate of RBI.
IT depends on how the company wants to issue it.
Why does company do it?
We already talked that the company wants to reduce risk of interest rate risk.
The company doesn't want to always give 14%, it's possible
that after 3 years what's the market interest rate.
we can get money at 10% , why should we give 14% to someone?
And I gave you an example of this.
It can say whatever the SBI mclr rate is,
The company will give 5% or 3% on that mclr rate.
If we talk about internationally, London interbank offer rate
is used generally as a benchmark date.
Plus the company can give x percent on top of that.
Now those were callable and adjustable preference shares.
Now let's see what are participation preference shares.
So participation preference shares mean,
that you get some additional benefits.
What are these additional benefits?
Participation means that these shares are
participating in the benefits of some common shares.
If it's a participating preference share then it gets some benefits of common shares.
Now, what are these benefits?
Generally, there are two benefits,
One is that it can get additional dividends.
They will definitely get 14% fixed dividends here,
but assume the company gave more than 14% dividends to common shares.
Let's say the company said
The preference shares will get 10Rs per share dividends,
While the company gave 12 Rs per share dividend
to common shares in one year.
So this difference of 2 Rs,
The company will have to give 12 Rs per share to preference shares,
if it's written that these are participating preference shares,
and the dividends for common shares is more,
so whatever the difference is,
the company will have to give preference shares that.
So if dividends for common shares get more than
a certain amount, then the company has to pay the difference.
Second,
if there is any liquidation event, the company is getting sold,
so in this case all the preference shares will get initial capital,
plus common shareholders are getting whatever money
on the pro-rata basis, preference shares will get that as well.
Let's understand it also from an example.
Let's assume when the company initially raised the money,
So the total share capital was let's say 10 crores,
and in that, the preference shares were of 2 crores.
2 crores mean 20% capital was of preference shares,
and if we talk about common shares then it was 8 crores.
Now assume that after some this company
is sold for 15 crores.
So the total share capital of the company is 15 crores here.
So in this case who will get how much money?
If there is participating share, how much will it get in that case
and how much will get in case of a non-participating share?
Let's see that.
So initial capital for preference share was 2 crores,
so it's always a safe capital.
SO preference participating shares will get 2 crores,
plus
their capital was 20%.
So we'll minus these 2 crores from 15 crores.
So what's the remaining balance?
13 crores remaining.
Now 20% of these 13 crores,
that will be given additionally. what's 20% of 13 crores?
2.6 crores.
So in this case participating preference shares will get a total of 4.6 crores.
But if there is any non-participating preference share,
then it'll get only, I'll write it down here.
non-participating will get only 2 crores.
cause preference share capital is always a safe capital.
It works like a bond.
Preference shares only deal with their dividends,
they don't deal with the company's growth that much.
But if there is any participating preference share,
that means it wants to participate in the growth of the company.
right?
So if there is a liquidation event, the company is sold at a higher price,
then preference shares get profit in that case.
And we also saw the benefits of dividends,
that if common shares get more dividends, then whatever the
difference is, preference shares will get that as well.
So I think after watching the video, you now have an idea
about the types of preference shares.
And whenever you read a document of preference share,
then read the terms and conditions carefully.
So you understand properly what you're being promised.
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