Page 23 - DMGT409Basic Financial Management

Basic Financial Management

Notes 2. Claim on Income: Not only the prior claim on assets at the time of liquidation, they also
have prior claim on income or profits. Preference dividend must be paid in full before

payment of any dividend on the equity share capital.
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Did u know? What is senior security?
As preference share capital lies between debenture capital and equity share capital with
regards to claim on assets and income of the company. Hence, it is called as “senior
security”.
3. Accumulation of Dividend: Most of the preference shares dividend is cumulative. It means
that all the unpaid/arrears dividends are carried forward for the next year and paid with
the current year’s dividend before payment of any dividend to equity shareholders.

Example: Company A issues 10 per cent preference shares of ` 100 each, in the beginning

of the financial year. The company needs to pay ` 10 as dividend but due to loss it was not able
to pay, in this case the ` 10 is carried to the next year. If there are any profits in next year the

company has to pay last year’s dividend and the current year’s dividend. Thereby the total dividend
is `20.
4. Redeemable: Preference share capital has limited maturity period (if issued as redeemable)

after that the share capital has to be refunded. It provides flexibility in capital structure,
which is beneficial to the company.

5. Fixed Rate of Dividend: Issue of preference shares are at a fixed rate of dividend. The rate

is at par value basis.
6. Convertible: Convertible preference shares capital has the feature of conversion of preference
shareholders investment into fully or partly paid equity shares at a pre-determined ratio
within a given/specifi ed period.
7. Participation in Surplus Profi ts: Sometimes preference share capital is in the nature of
participation in surplus profi ts.

Note It may be noted that the companies have to follow a prescribed procedure for issue
of shares as per the Companies Act and the guidelines issued by Securities and Exchange
Board of India (SEBI).

2.2.2 Issue of Debentures

The companies can raise long-term funds by issuing debentures that carry assured rate of return

for investors in the form of a fixed rate of interest. It is known as debt capital or borrowed capital
of the company. The debenture is a written acknowledgement of money borrowed. It specifi es
the terms and conditions, such as rate of interest, time of repayment, security offered, etc. These
are offered to the public to subscribe in the same manner as is done in the case of shares.
Features of Debentures

The features of debentures/bonds are as follows:
1. Fixed Rate of Interest: In general the debentures are issued at a fi xed rate of interest, but
they may also issued at a floating rate of interest or a zero interest.

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