Preference Shares vs Equity Shares
Preference shares and equity shares are two major types of share capital that represent ownership in a company. Both signify an investor’s stake in the business but differ significantly in terms of rights, returns, risk, and control. Understanding these differences is crucial for investors as well as for companies raising capital.
Meaning
- Preference Shares: These are shares that carry preferential rights over equity shares in two main aspects — the payment of dividends and the repayment of capital in the event of liquidation. Preference shareholders receive a fixed rate of dividend before any dividend is paid to equity shareholders.
- Equity Shares: Also known as ordinary shares, these represent the basic ownership of the company. Equity shareholders are entitled to residual profits after all other obligations, including preference dividends, have been paid. They have voting rights and play a key role in controlling the management of the company.
Key Differences Between Preference Shares and Equity Shares
| Basis of Difference | Preference Shares | Equity Shares |
|---|---|---|
| 1. Meaning | Shares that provide preferential rights regarding dividend payment and capital repayment. | Ordinary shares representing ownership in the company without preferential rights. |
| 2. Dividend Rate | Fixed dividend rate, predetermined at the time of issue. | Variable dividend rate, depending on company profits. |
| 3. Dividend Payment Priority | Dividends are paid before any equity dividend is declared. | Dividends are paid after preference shareholders receive their due. |
| 4. Right to Vote | Usually no voting rights, except in special circumstances (e.g., when dividends remain unpaid for 2 years). | Have full voting rights in all company matters. |
| 5. Participation in Management | Do not participate in company management. | Actively participate in management through voting and general meetings. |
| 6. Risk and Return | Lower risk with fixed but limited returns. | Higher risk with potentially higher returns. |
| 7. Priority at Liquidation | Preference shareholders are paid first when assets are distributed during winding up. | Equity shareholders are paid last, after all liabilities and preference capital. |
| 8. Convertibility | May be convertible into equity shares (convertible preference shares) or non-convertible. | Non-convertible by nature. |
| 9. Redemption | May be redeemable (repayable after a fixed period) or irredeemable. | Not redeemable during the life of the company. |
| 10. Capital Repayment | Have priority in repayment of capital before equity holders. | Entitled to capital only after preference capital is repaid. |
| 11. Participation in Profits | Usually limited to fixed dividend; may get extra only if participating preference shares. | Entitled to all residual profits after all fixed obligations are met. |
| 12. Suitability for Investors | Preferred by investors seeking steady and safe income. | Suitable for investors seeking capital appreciation and ownership control. |
| 13. Cost to Company | More expensive, as dividends are not tax-deductible. | Relatively cheaper source of capital in the long term. |
| 14. Arrears of Dividend | In case of cumulative preference shares, unpaid dividends accumulate. | Equity shareholders cannot claim arrears of dividends. |
| 15. Example of Return | A 10% preference share receives ₹10 per year on a ₹100 face value share. | Equity dividend may vary — ₹5 one year, ₹15 another year, or even zero. |
Legal Framework in India
Under the Companies Act, 2013:
- Preference shares can only be redeemable (Section 55) — the company must redeem them within 20 years, except for infrastructure projects (up to 30 years).
- Equity shareholders have residual claim on profits and assets after preference shareholders.
- Preference shareholders enjoy voting rights only when their dividend remains unpaid for two or more consecutive years or on matters affecting their rights.
Advantages and Disadvantages
Advantages of Preference Shares
- Fixed, regular income to investors.
- Safer investment compared to equity shares.
- No dilution of control for existing equity shareholders.
- Enhances company’s creditworthiness by adding quasi-equity capital.
Disadvantages of Preference Shares
- No voting rights or control in management.
- Limited return potential even in highly profitable years.
- Dividend is not tax-deductible, increasing cost for the company.
Advantages of Equity Shares
- Right to vote and participate in management decisions.
- Potential for high returns through dividends and capital appreciation.
- Permanent source of capital for the company.
- No fixed financial obligation — dividend payment depends on profits.
Disadvantages of Equity Shares
- Greater risk due to fluctuations in profits and market prices.
- Dividends are uncertain and variable.
- Residual claim on assets in case of liquidation.
Investor Perspective
- Conservative investors (seeking stability and fixed returns) prefer preference shares.
- Aggressive investors (seeking high returns and ownership participation) choose equity shares.
Example
Suppose a company issues:
- 10,000 Preference Shares of ₹100 each at a 10% dividend rate, and
- 10,000 Equity Shares of ₹100 each.
If the company earns ₹15,00,000 profit after tax:
- Preference shareholders receive ₹1,00,000 (10% of ₹10,00,000).
- Remaining ₹14,00,000 is distributed among equity shareholders.
Originally written on
May 4, 2015
and last modified on
November 5, 2025.
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suraj kumar Chaudhary
October 15, 2017 at 9:30 pmThank you sir
Pranav Maingi
July 25, 2018 at 8:55 pmWhat is the difference between preference shareholders and equity shareholders
Murugan
September 5, 2019 at 5:29 pmThe differences are explained clearly in easily understandable way.