– Sikha Bansal, Partner and Megha Mittal, Associate (firstname.lastname@example.org)
Preference shares, as the nomenclature suggests, represent that part of a Company’s capital which carries ‘preference´ vis-à-vis equity shares, with respect to payment of dividend and repayment of capital in case of winding up. However, the real position of preference shares may be quite baffling, given that the instrument, by its very nature, is sandwiched between equity capital and debt instruments. Although envisaged as a superior class of shares, preference shareholders enjoy neither the voting powers vested with the equity shareholders (true shareholders) nor the advantages vested with debenture-holders (true creditors). As such, the preference shareholders find themselves suspended midway between true creditors and true shareholders – hence facing the worst of both worlds.
The ambivalence associated with preference shares is adequately reflected in the manner various laws deal with such shares – a preference share is a part of ‘share-capital’ by legal classification, but can be a ‘debt’ as per accounting classification; similarly, while a compulsorily convertible preference share is classified as an ‘equity instrument’, any other preference share constitutes external commercial borrowing under foreign exchange laws. Needless to say, the divergent treatment is owed to the objective which each legislation assumes.