PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS TYBMS - 5
SUB: SPECIAL STUDIES IN FINANCE (S.S.F)
NAME ANNU AGARWAL ASHISH BANKERAIKA RAJESH JAIN BHAVESH PATEL PRITESH SHAH KEYUR SUMERIA ROLL NO. 01 10 32 56 70 82
The completion of this project would not have been Possible without the guidance, aid & encouragement of many people. We would like to express our sincere Gratitude to them. We would like to thank our project Guide Prof. POULOMI BURMAN without whose encouragement & Guidance the completion of this project would have been Impossible. Last but not the least we would like to thank our family Members & friends who helped us in this project. It was only because of their encouragement the completion of this project has been possible
Raising capital by issue of shares is a most important method of raising long-term funds. Those funds can be invested in long-term or permanent assets like land and building, plant and machinery, furniture etc. A share is unit of measure of a shareholder's interest in the total capital of the company. Share capital of a company is divided into a large number of equal parts and each part is known is a share. According to Companies Act, a company can issue two types of shares preference and equity. Preference shares. Sec. 85(1) of the Companies Act defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. Thus, both the preferential rights viz. (a) preference in payment of dividend and (b) preference in repayment of capital in case of winding up of the company, must attach to preference shares. The rate of dividend on these shares is fixed and the dividend on these shares must be paid before any dividend is paid to ordinary shares. Directors, however, may decide not to pay any dividend to any class of shareholders even if there are sufficient profits. But, if any how, they decide to pay the dividend, preference shareholders will get the priority to pay the ordinary shareholders.
1) Maturity: The companies act 1956 prohibits issue of irredeemable preference shares or redeemable within a period of 20 years from the date of issue. 2) Conversion: Preference shares can be convertible. Convertible preference shares are those which are convertible into equity shares. As against this non-convertible shares are those which are not convertible into equity shares.
3) Participation in Income: Prefernce shares can be participating or nonparticipating. Participating preference shares have a right to share the surplus, profits remaining after paying dividend to the equity shareholders. Preference shareholders have priority claim to dividend over equity shareholders. The shareholders are paid dividend at fixed rate which is specified in the agreement. The company can distribute earnings among equity shareholders only after payment of stipulated dividend to shareholders. 4) Claim of Assets: In the event of dissolution of the company, the preference shareholders will receive their portion of the proceeds before holders of equity shares. 5) No Controlling Power: Preference share holders do not hold any control over the decision making in the company as compared to equity share holders.
Types of preference shares
1) Cumulative and Non-cumulative Preference shares: Cumulative preference shares enjoy the right to receive the dividend in arrears for the years in which company earned no profits or insufficient profits, in the year in which company earns profits. In other words, dividend on these shares will go on accumulating until it is paid in full with arrears, before any dividend is paid on equity shareholders. In case of non-cumulative preference shares dividend does not accumulate and therefore, no arrears of dividend will be paid in the year of profits. If company does not have any profits in a year, no dividend will be paid to noncumulative preference shareholders. 2) Redeemable and Irredeemable Preference Shares: Redeemable preference shares can be redeemed on or after a period fixed for redemption under the terms of issue or after giving a proper notice of redemption to preference shareholders. The companies Act, however, imposes certain restrictions for the redemption of preference shares. Irredeemable preference shares are those shares which cannot be redeemed during the lifetime of the company. 3) Convertible and Non-convertible preference shares: Where the preference shareholders are given a right to covert their holding into ordinary shares, within a specified period of time, such shares as known as convertible preference shares. The holders of non-convertible preference shares have no such right of conversion. 4) Participating and Non-participating Preference Shares The holders of participating preference shares have a right to participate in the surplus profits of the company remained after paying dividend to the ordinary shareholders and preference shareholders at a fixed rate. The preference shares which do not have such right to participate in surplus profits, are known as nonparticipating preference shares.
The advantages of Preference shares are as follows:
(A) Advantages from Company point of view: The company has the following advantages by issue of preference shares.
Fixed Return: The dividend payable on preference shares is fixed that is usually lower than that payable on equity shares. Thus they help the company in maximizing the profits available for dividend to equity shareholders
No Voting Right: Preference shareholders have no voting right on matters not directly affecting their right hence promoters or management can retain control over the affairs of the company.
Flexibility in Capital Structure: The company can maintain flexibility in its capital structure by issuing redeemable preference shares as they can be redeemed under terms of issue.
No Burden on Finance: Issue of preference shares does not prove a burden on the finance of the company because dividends are paid only if profits are available otherwise no dividend.
No Charge on Assets: No-payment of dividend on preference shares does not create a charge on the assets of the company as is in the case of debentures.
Widens Capital Market: The issue of preference shares widens the scope of capital market as they provide the safety to the investors as well as a fixed rate of return. If company does not issue preference shares, it will not be able to attract the capital from such moderate type of investors.
(B) Advantages from Investors point of view:
Investors in preference shares have the following advantages:
Regular Fixed Income: Investors in cumulative preference shares get a fixed rate of dividend on preference share regularly even if there is no profit. Arrears of dividend, if any, is paid in the year's) of profits.
Preferential Rights: Preference shares carry preferential right as regard to payment of dividend and preferential as regards repayment of capital in case of winding up of company. Thus they enjoy the minimum risk.
Voting Right for Safety of Interest: Preference shareholders are given voting rights in matters directly affecting their interest. It means, their interest is safeguarded.
Lesser Capital Losses: As the preference shareholders enjoy the preferential right of repayment of their capital in case of winding up of company, it saves them from capital losses.
Fair Security: Preference share are fair securities for the shareholders during depression periods when the profits of the company are down.
The Disadvantages of Preference Shares are as follows:
The important disadvantages of the issue of preference shares are as below: (A) Demerits for companies: The following disadvantages to the issuing company are associated with the issue of preference shares.
Higher Rate of Dividend: Company is to pay higher dividend on these shares than the prevailing rate of interest on debentures of bonds. Thus, it usually increases the cost of capital for the company.
Financial Burden: Most of the preference shares are issued cumulative which means that all the arrears of preference dividend must be paid before anything can be paid to equity shareholders. The company is under an obligation to pay dividend on such shares. It thus, reduces the profits for equity shareholders.
Dilution of Claim over Assets: The issue of preference shares involves dilution of equity shareholders claim over the assets of the company because preference shareholders have the preferential right on the assets of the company in case of winding up.
Adverse effect on credit-worthiness: The credit worthiness of the company is seriously affected by the issue of preference shares. The creditors may anticipate that the continuance of dividend on preference shares and suspension of dividend on equity capital may depreive them of the chance of getting back their principal in full in the event of dissolution of the company, because preference capital has the preference right over the assets of the company.
Tax disadvantage: The taxable income is not reduced by the amount of preference dividend while in case of debentures or bonds, the interest paid to them is deductible in full.
(B) Demerits for Investors:
Main disadvantages of preference shares to investors are:
No Voting Right: The preference shareholders do not enjoy any voting right except in matters directed affecting their interest.
Fixed Income: The dividend on preference shares other than participating preference shares is fixed even if the company earns higher profits.
No claim over surplus: The preferential shareholders have no claim over the surplus. They can only ask for the return of their capital investment in the company.
No Guarantee of Assets: Company provides no security to the preference capital as is made in the case of debentures. Thus their interests are not protected by the assets of the company.
Preferred shares are more common in private or pre-public companies, where it is more useful to distinguish between the control of and the economic interest in the company. Government regulations and the rules of stock exchanges may discourage or encourage the issuance of publicly traded preferred shares. In many countries banks are encouraged to issue preferred stock as a source of Tier 1 capital. On the other hand, the Tel Aviv Stock Exchange prohibits listed companies from having more than one class of capital stock. A single company may issue several classes of preferred stock. For example, a company may undergo several rounds of financing, with each round receiving separate rights and having a separate class of preferred stock; such a company might have "Series A Preferred," "Series B Preferred," "Series C Preferred" and common stock. There are income tax advantages generally available to corporations that invest in preferred stocks in the United States that are not available to individuals. Advantages of straight preferreds posited by some advisers include higher yields and tax advantages (currently yield some 2% more than 10-year Treasuries, rank ahead of common stock in the case of bankruptcy, dividends are taxable at a maximum 15% rather than at ordinary income rates, as in the case of bond interest).
Comparision between equity shares and preference shares:
Preference shares Equity shares
These shares are entitled to a fixed rate of dividend.
The rate of dividend on equity shares depends upon the amount of profit available and the funds requirements of the company for future expansion etc.
Dividend on these shares is paid in preference to the equity shares.
The dividend on equity shares is paid only after the preference dividend has been paid.
Redeemable preference shares may be redeemed by the company.
Equity shares can not be redeemed except under a scheme involving reduction of capital or buy back of its own shares.
The voting rights of these shares are restricted.
An equity share holder can vote on all matters affecting the company.
The preference shares have preference to equity shares with regard to payment of capital on winding up.
Canada Preferred shares represent a significant portion of Canadian capital markets, with over CAD 5-billion in new preferred shares issued in 2005. Many Canadian issuers are financial organizations that may count capital raised in the preferred share market as Tier 1 capital, provided that the shares issued are perpetual. Another class of issuer are "split share corporations." Investors in Canadian preferred shares are generally those who wish to hold fixedincome investments in a taxable portfolio. Preferential tax treatment of dividend income, as opposed to interest income, may in many cases result in a greater aftertax return than might be achieved with bonds.
Germany Preference shares in German stock exchanges is usually indicated with V, VA or Vz, short for Vorzugsaktie, for example "BMW Vz", in contrast to St or StA, short for Stammaktie for standard shares. Preferred stock may amount to up to half of the total equity. Preferred stock is convertible into common stock, but conversion needs approval by majority vote in the stockholders' meeting. If the vote passes, German law requires consensus with preferred stock holders to convert their stock, which is usually encouraged by offering a one-time premium to preferred stock holders. The firm's intention to do so may arise from its finance policy i.e. ranking in a specific index. Industry stock exchange indices usually do not consider preferred stock in determining daily trading volume of a company's stock e.g. do not qualify the company for a listing due to the low trading volume in (just common) stocks.
United Kingdom Perpetual non-cumulative preference shares may be included as Tier 1 capital. Perpetual cumulative preferred shares are Upper Tier 2 capital. Dated preferred shares (normally having an original maturity of at least five years) may be included in Lower Tier 2 capital.
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Czech Republic ± Preferred stock cannot be more than 50% of total equity. France ± By a law that dates from June 2004, France allows the creation of preferred shares. South Africa ± Dividends from preference shares are not taxable as income in the hands of individuals. Brazil ± In Brazil, up to 50% of the capital stock of a company may be composed of preferred stock. The preferred stock will have at least one less right than the common stock (normally voting power) but will have preference in receiving dividends.
GRAPHS AND CHARTS
25 20 15 10 5 0 male female total gender
According to survey in above table there are about 20 people surveyed in this 13 are males and 7 are females all are having good knowledge about shares and they regularly trade in shares.This is the overall picture of share investment.
Age Male Female Total
30-45 6 4 10
46-55 2 2 4
55 and above 5 1 6
25 20 15 56 and above 10 5 0 male female total 46-55 30-45
In this table we have surveyed the age group of 30-45;46-55;and 55 and above.according to our survey people of 30-45 age group there are about 10 people who invest in shares and in the age group of 46-55 there are about 4 people who invest in shares and last age group of 55 and above there are about 6 people who trade in shares.
Martial status Male Female total
Single 4 4 8
Married 9 3 12
14 12 10 8 6 4 2 0 male female total single married
From the above graph people who are married invest more in shares as their savings are more and for future purpose to get good return on their investment
education Male Female total
graduate 6 4 10
Post graduate 4 2 6
Under graduate 2 1 3
Other if any 1 0 1
12 10 8 under graduate 6 4 2 0 male female total graduate post graduate other if any
According to above graph there are 3 people under graduate;10 people graduate;6 people post graduate;and others 1.mostly graduate people invest in shares and trade.
occupation Male Female total
business 6 2 8
service 3 4 7
professional 3 0 3
other 1 1 2
9 8 7 6 5 4 3 2 1 0 service business professional other male female total
According to this graph there are total 7 service people;8 business;3 professional;and 2 others who invest in shares.from this we can conclude that mostly businessman trade in shares.
Monthly income Male Female total
Less than 15000 1 1 2
15001-30000 6 4 10
30001 and above 6 2 8
15 total 10 female male 5
0 less than 15000 15000-30000 30000 and above
According to survey there are 2 people whose income is under 15000per month;around 10 people earn 15000-30000 per month;around 8 people are 30000 and above who earn and invest in shares.in this we can conclude we can see that people having more income can save and invest in shares to earn profit.
Do you invest in shares Male female Total
Yes 13 7 20
No 0 0 0
15 no 10 yes
0 male female total
According to survey 20 people were surveyed and all invest in shares to earn profit.now a days shares are important part of life and people prefer investment in shares much more preferable then any other profitable saving
Do you invest in preference share Male Female total
yes 3 1 4
No 2 1 3
25 20 15 Series3 10 5 0 do you invest in preference shares male female total Series2 Series1
According to survey 5 male people invest in preference share and 2 female invest in preference shares;as preference shares are not easily available in market so they don t actually look for investing in preference shares.
Are you getting proper dividend on preference shares Male Female Total
3 1 4
2 1 3
8 7 6 5 4 3 2 1 0 male female total no yes
According to survey 3 male people and 1 female were satsfied about their return on investment and other were not satisfied from return on investment as preference shares dividend are fixed and even at high profit dividend is low.
If you get a chance will you invest again Male Female Total
Yes 3 1 4
No 2 1 3
8 7 6 5 4 3 2 1 0 1 2 3 4 if get chance will you invest in preference shares no yes
According to above graph very few are ready to reinvest in preference shares as they are not satisfied on return on investment and low dividend factor.
Factors influencing the choice of investment Male Female Total
3 1 4
1 0 1
0 0 0
1 1 2
9 8 7 6 5 4 3 2 1 0 Past record of organization Growth prospect Credit Rating Safety total female male
According to above graph people look credit worthiness of company and reliability;brand image of company and also the past records of the company play an important role in influencing investors preference.
Sources of information about the investment Male Female Total
2 1 3
1 0 1
1 0 1
0 1 1
1 0 1
7 6 5 4 total 3 2 1 0 Bankers Newspaper TV Internet Friends Advice female male
There are various sources like bankers;internet;tv;news paper;people from above graph get knowledge about preference shares from their bankers,friend and also from news paper.
As you see, preference shares are not really stocks -- they have many features of bonds, such as assured returns. In fact, they are like fixed income instruments -- their value remains the price at which the company issued them, while their dividends are fixed, just like interest payments. Sometimes though, preference shares have the option to be converted into ordinary shares. In case the company is winding up and its assets (land, buildings, offices, machinery, furniture, etc) are being sold, the money that comes from this sale is given to the shareholders. After all, shareholders invest in a business and own a portion of it. Preference shareholders' get the money first. Their accounts are settled before that of the ordinary shareholders, who are the last to get paid. Preference shares can be tailored to give control to an investor in a private company by contract and through the company s articles of association. However, preference shareholders will not be able to control a public company or a private company that will be doing an IPO. In the circumstances, deals in India involve a significant equity component.
1) www.investorwords.com 2) moneyterms.co.uk 3) www.jstor.org