What Is A Preference Share? Features, Types & Difference From Equity Shares

A preference share is a financial instrument. It gives shareholders a fixed return and priority over ordinary shareholders during dividend payouts and liquidation.

Suppose your company wants to raise ₹40 crore for expansion. So, you issue ₹8 crore worth of preference shares with a fixed dividend of 6.5% annually. 

This means that investors or shareholders will receive ₹6.50 per share annually for every ₹100 invested, regardless of the company’s profits. During liquidation, you will pay these investors before equity shareholders.

Recently, Reliance Power raised ₹348 crore through a preferential allotment of shares. It shows how companies prefer this route for focused fundraising. 

Through this blog, we will learn about preference shares in detail, including its features, types, and how they are different from equity shares.

Key Features Of Preference Shares

Preference shares are a mix of two financial elements:

• They offer fixed income like debt.
• Shareholders are part of the company’s ownership, just like equity shares.

The following characteristics make preference shares unique:

1. Fixed Return

As an investor, you will receive a predetermined return, known as a dividend, regardless of the company's annual profits.

Suppose that a share’s face value is ₹100 with a 7% dividend rate. Then, you will receive a yearly return of ₹7 per share.

2. Paid Before Equity Shareholders

When a company declares dividends, priority is given to the preference shareholders. Equity shareholders receive their share only after preference investors are paid.

3. Asset Priority at Liquidation

If the company shuts down or undergoes liquidation, preference shareholders get their share of assets before equity holders. 

4. No Regular Voting Rights

Most preference shares do not grant the holder the right to vote in company matters. However, voting rights may apply in special cases, like if dividends remain unpaid for a certain number of years.

5. Convertible Options

Some preference shares can be converted into equity after a fixed duration or upon reaching specific conditions set by the company.

For example, Ather Energy converted its preference shares into equity before planning an IPO.

6. Redemption Possibility

Companies can buy back redeemable preference shares after a certain period. Recently, Jamieson Wellness Inc. redeemed its Series A preference shares after their maturity.

Types Of Preference Shares

Preference shares are issued with different conditions. If you understand these, then you can make informed decisions as an investor:

A. Convertible

These can later be changed into equity shares at a set ratio. The following are some examples:
 

These examples show how preference shares can be used strategically for both funding and wealth creation.

B. Non-Convertible

They remain preference shares permanently and do not turn into equity under any condition.

C. Participating

These receive a fixed dividend and may also get additional profits if available after equity holders are paid.

D. Non-Participating

Only fixed dividends are paid, with no right to any surplus profits.

E. Cumulative

If the company skips a dividend in any year, it is carried forward and paid later.

F. Non-Cumulative

No dividend is carried forward. If the company skips a payout, it’s considered lost. 

G. Redeemable

The company redeems these after a set time. Jamieson Wellness redeemed a full series of such shares in 2025.

H. Non-Redeemable

These are issued without a maturity date. They continue until the company is dissolved.

I. Adjustable

Here, dividend rates are flexible and may change based on financial benchmarks, such as the repo rate or inflation figures.
 

The above-mentioned table shows the comparison within the shares.

How Do Preference Shares Differ From Equity Shares?

The key differences between these two ownership-based instruments revolve around risk, control, and returns.
 

From the above-mentioned table, you can clearly see a comparison between equity and preference shares.

Real-World Usage Of Preference Shares

Companies across industries frequently issue preference shares:
 

This table shows how preference shares serve both strategic and financial goals for companies.

Should You Consider Preference Shares?

These shares are ideal for you if you:

• Prefer stable, fixed returns.
   
• Want priority over equity holders.
   
• Don’t need voting rights.
   
• Seek lower-risk ownership instruments.
   

Example:

Samiksha is 55 years old. She prefers steady income over volatile equity gains. She invested ₹1,00,000 in 6.5% preference shares. Now, without any market stress, she receives ₹6,500 annually.

Conclusion

You might have understood by now that preference shares offer a balanced path between fixed income and equity ownership.

They provide regular dividends, priority over equity shareholders, and reduced risk, which makes them appealing for conservative investors. At the same time, companies benefit by raising capital without giving up voting control.

They may not offer the high growth of equity shares, but their stability, fixed returns, and special rights make them a smart addition to your diversified investment plan.

FAQs

1. Can preference shares be part of an IPO?

Generally, IPOs are for equity shares, but companies can separately issue preference shares.

2. Are dividends from preference shares taxable?

Yes, they are taxed based on the investor’s income slab.

3. Can preference shares be traded?

Some are listed and can be traded on exchanges.

4. Do preference shareholders attend Annual General Meetings?

They can, but usually without voting rights unless specified.

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