A redeemable preference share scheme, also known as redeemable preference shares or redeemable preferred stock, is a type of financial instrument that a company may issue to raise capital from investors. Redeemable preference shares are a hybrid security that combines elements of both equity and debt. Here’s how they work:
- Preference Shares: Redeemable preference shares are a class of preferred stock. Preferred stockholders have a higher claim on the company’s assets and earnings than common shareholders. They typically receive fixed dividends before any dividends are paid to common shareholders.
- Redeemable Feature: The key feature that distinguishes redeemable preference shares from traditional preference shares is the “redeemable” aspect. This means that the company has the option to buy back (redeem) these shares from the shareholders at a predetermined price after a certain period or under specific conditions. This buyback usually occurs at the option of the company or on a specified future date.
- Fixed Dividends: Like regular preference shares, redeemable preference shares often come with fixed dividend rates. Shareholders receive these fixed dividends before common shareholders receive any dividends. The fixed nature of these dividends makes them similar to interest payments on debt.
- No Voting Rights: In most cases, holders of redeemable preference shares do not have voting rights in the company. This distinguishes them from common shareholders, who typically have voting power in corporate decisions.
- Maturity Date or Conditions: The company specifies the terms and conditions under which it can redeem the preference shares. This can include a predetermined date (e.g., 5 years from the issuance date) or specific conditions (e.g., when the company reaches a certain financial milestone). The terms are outlined in the share issuance documents.
The primary purpose of issuing redeemable preference shares is to raise capital for the company without diluting ownership or control. Companies can issue these shares to investors who are looking for a fixed income stream but are willing to take on some level of risk since the redemption is not guaranteed.
Investors in redeemable preference shares benefit from fixed dividends and the potential for capital appreciation if the company redeems the shares at a premium to the original issuance price. However, they also face the risk that the company may not exercise its redemption option, in which case the shares continue to pay dividends indefinitely.
It’s important for investors to carefully review the terms and conditions of redeemable preference shares before investing, as the specifics can vary from one company to another and can impact the investment’s risk and return profile. Additionally, tax implications may vary depending on the jurisdiction and the terms of the shares.
To reach the My Money Insights editorial team on your feedback, story ideas and pitches, contact us here.