How to Buy Preference Shares in India

Investing in preference shares is an excellent way to diversify your portfolio while securing a steady stream of income. Preference shares, often considered a hybrid between equity and debt, come with unique features like fixed dividends and priority over common shares in case of liquidation.

In this guide, we will cover everything you need to know about buying preference shares, from understanding their types to navigating the purchase process. Let’s explore how you can make preference shares a valuable addition to your investment journey.

What Are Preference Shares?

Preference shares are a class of shares that provide certain privileges over ordinary shares. These shares come with fixed dividend payouts and have preferential rights when it comes to dividend distribution and asset claims during company liquidation.

Key Features:

• Fixed Dividends: A predetermined rate of return.
• Priority Claims: Preference over equity shareholders in dividends and asset distribution.
• Limited Voting Rights: Typically, preference shareholders don’t have voting rights in company decisions.
• Hybrid Nature: Combines features of equity and debt investments.

Types of Preference Shares

Understanding the various types of preference shares can help you make an informed investment decision:

1. Cumulative Preference Shares
   • Dividends accumulate if not paid in a particular year.
   • Example: If a company misses dividends in Year 1, it pays both Year 1 and Year 2 dividends in the next payout.
2. Non-Cumulative Preference Shares
   • Dividends do not accumulate if unpaid.
   • Suitable for investors seeking regular income without worrying about missed payments.
3. Convertible Preference Shares
   • Can be converted into equity shares after a specified period.
   • Example: An investor may convert shares when the company’s stock prices increase significantly.
4. Non-Convertible Preference Shares
   • Cannot be converted into equity shares.
   • Ideal for investors seeking fixed income without equity exposure.
5. Redeemable Preference Shares
   • Company redeems these shares after a specified period.
   • Example: A company issues shares with a redemption date 5 years from the issue.
6. Irredeemable Preference Shares
   • Cannot be redeemed during the lifetime of the company.
   • Provide consistent income for long-term investors.

Why Invest in Preference Shares?

Preference shares are attractive for investors looking for:

1. Steady Income: Fixed dividend payouts offer a predictable income stream.
2. Lower Risk: Priority over equity shareholders reduces investment risk.
3. Portfolio Diversification: Adds a stable asset to balance volatile investments.
4. Tax Benefits: In India, dividends from preference shares may enjoy certain tax advantages.

How to Buy Preference Shares

Step 1: Understand Your Investment Goals

Determine why you want to invest in preference shares:

• Are you seeking regular income?
• Do you prefer low-risk investments?
• Are you interested in potential equity conversion?

Step 2: Research the Market

Analyze available preference shares and compare their features:

Look for:

• Dividend yield
• Redemption terms
• Market trends

Step 3: Choose a Reliable Broker

A broker simplifies the buying process by offering:

• Access to the stock market
• Expert advice
• Online platforms for seamless transactions

Examples of Popular Brokers in India:

• Zerodha
• Upstox
• ICICI Direct

Step 4: Open a Demat Account

To trade preference shares, you need a Demat account:

• Submit KYC documents.
• Link your bank account.
• Choose a trusted Depository Participant (DP).

Step 5: Place Your Order

Steps to execute your purchase:

1. Log in to your trading platform.
2. Search for the preference share using the company’s name or ticker symbol.
3. Specify the quantity and price.
4. Confirm your order.

Step 6: Monitor Your Investment

Track the performance of your preference shares by reviewing:

• Dividend payouts
• Market price changes
• Company’s financial health

Key Considerations Before Investing

1. Dividend Rate: Assess the annual return rate.
2. Company Reputation: Invest in financially stable and reputable companies.
3. Market Conditions: Analyze economic trends and their impact on your investment.
4. Liquidity: Ensure the shares can be easily bought or sold in the market.

Tax Implications in India

In India, dividends from preference shares are taxable based on your income slab. It’s advisable to consult a tax advisor to understand your obligations and optimize your returns.

Frequently Asked Questions (FAQs)

1. Can I sell preference shares before maturity? Yes, preference shares can be traded on stock exchanges, provided they are listed.

2. Are preference shares better than equity shares? Preference shares are ideal for investors seeking stability, while equity shares suit those looking for high growth potential.

3. What is the minimum amount required to invest? The minimum investment depends on the company and market price of the shares.

4. Are dividends from preference shares guaranteed? While dividends are fixed, their payout depends on the company’s profitability and discretion unless the shares are cumulative.

5. What are the risks of investing in preference shares? Risks include company defaults, limited capital appreciation, and lower liquidity compared to equity shares.

6. How do I choose the right preference shares? Consider factors like dividend rate, company’s creditworthiness, redemption terms, and market performance before investing.

7. Can NRIs invest in preference shares in India? Yes, Non-Resident Indians (NRIs) can invest in preference shares, subject to compliance with RBI guidelines and company policies.

Buying preference shares is a smart investment for individuals seeking steady returns and lower risk. By understanding the types, benefits, and purchase process, you can make informed decisions and build a balanced portfolio. Remember to keep an eye on market trends and consult experts when necessary.