Page 308 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 13: Valuation of Preference Shares

• The company keeps on getting money by selling subsidiaries and businesses here n Notes
there!
• The company will require about ` 195 cr to redeem the preference shares (along
with dividend), which may not seem out of reach, but considering the large debt and
negative cash-flows, seems unnerving, to say the least.
• The biggest risk here is the management. They are no saints, lemme tell you! Just
look at this postal ballot they got passed.
• Basically what they did was something like this...the Companies Act confers voting
rights on preference shareholders, if their dividend is not paid for a period of 2 years.
Since Network18 had not paid dividend, the preference shareholders would have
gained voting rights.
• So the company declared that it had received letters from preference shareholders
that they would like to waive their extra rights (now why would anybody do that)
and hence, through postal ballot, they got these preference shareholders’ rights
waived. (Promoters must be holding at least 50% of the preference shares, as per my
reading)
• So would they pay up at the time of redemption? Or would they find some loophole
or the other and do some hanky-panky? That’s a tough one to answer.
To Conclude
• Although the possible return here is mouth-watering, there are 2 big risks; the
financial position and the management.
• Both of them scare me to a great extent, to take a meaningful position.
• If one is ok with these risks and one thinks that they are not very material, Network18
offers a great opportunity to make respectable returns in this uncertain market. The
preference shares are fairly liquid too.
• Given my risk appetite, I personally intend to give this one a miss for now, but
I would like to keep a watch on future events (like insider buying) to revisit my
decision. For the bold and the dangerous people out there, do take a look at this
opportunity.

Questions
1. Analyse the problem of the case study.
2. Discuss the case facts and solution to the issue.
Source: http://neerajmarathe.blogspot.in/2011/10/network18-preference-shares-amazing.html

13.3 Summary

z z Preference Shares are issued by corporations or companies with the primary aim of
generating funds.

z z A preference share usually carries a fixed stated rate of dividend. The dividend is payable
only upon availability of profits.
z z Preference share holders have preference right over payment of dividend and settlement
of principal amount upon liquidation, over common share holders.

z z A preference share can be irredeemable or redeemable.
z z Preferred stock is similar to common stock in that it entitles its owners to receive dividends
which the firm must pay out of after-tax income. Moreover, the use of preferred stock as a
source of financing does not increase the probability of bankruptcy for the firm.

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