The Securities and Exchange Board of India (Sebi) recently proposed to permit companies to issue non-convertible debentures (NCDs) and non-convertible redeemable preference shares (NCRPS) with the face value of Rs. 10,000 as against the current system of Rs one lakh face value.
What are Preference Shares?
- Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued.
- If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.
- Non-Convertible v/s Convertible Preference Shares:
- Preference shares that can be easily converted into equity shares are known as convertible preference shares.
- Non-Convertible preference shares are those shares that cannot be converted into equity shares.
- Redeemable v/s Non-Redeemable Preference Shares:
- Redeemable preference shares are those shares that can be repurchased or redeemed by the issuing company at a fixed rate and date. These types of shares help the company by providing a cushion during times of inflation.
- Non-redeemable preference shares are those shares that cannot be redeemed or repurchased by the issuing company at a fixed date. Non-redeemable preference shares help companies by acting as a lifesaver during times of inflation.
- Other Types:
- Cumulative preference shares: Some preference shares also receive arrears of dividends, which are called cumulative preference shares.
- Participating preference shares: These help shareholders demand a part in the company’s surplus profit at the time of the company’s liquidation after the dividends have been paid to other shareholders. However, these shareholders receive fixed dividends and get part of the surplus profit of the company along with equity shareholders.
- Non-Participating preference shares: These do not benefit the shareholders the additional option of earning dividends from the surplus profits earned by the company, but they receive fixed dividends offered by the company.
- Adjustable Preference Shares: In the case of adjustable preference shares, the dividend rate is not fixed and is influenced by current market rates.
Key Facts about Debentures
- A debenture is a type of bond or other debt instrument that is unsecured by collateral.
- Since debentures have no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support.
- Both corporations and governments frequently issue debentures to raise capital or funds.
- Similar to most bonds, debentures may pay periodic interest payments called coupon payments.
- Convertible vs. Nonconvertible:
- Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period.
- They are attractive to investors that want to convert to equity if they believe the company's stock will rise in the long term.
- However, the ability to convert to equity comes at a price since convertible debentures pay a lower interest rate compared to other fixed-rate investments.
- Nonconvertible debentures are traditional debentures that cannot be converted into equity of the issuing corporation. To compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures.
Q1) What are equity shares?
Equity shares are defined as long-term financing options for firms looking to raise capital. Each equity share represents a unit of part ownership in the company. Equity shares are also referred to as common stock, or common shares, and are offered as an investment opportunity to the public. Investors in such shares hold the right to vote, share profits and claim assets of a company.