25 Apr
When it comes to raising money through shareholding, companies have the option to issue different types and forms of shares. Among these types, there are shares called preference shares which have two further subcategories, i.e., redeemable preference shares and irredeemable preference shares.
Redeemable preference shares are those shares that are commonly seen as preference shares with a redemption date on which the company will repurchase preference shares and discontinue the dividend payment. While irredeemable preference shares are slightly different from other types of preference shares, i.e., It does not have any maturity date, which makes this instrument the same as equity, except that the dividend of these shares is fixed.
This article looks at the meaning and differences between two types of preference shares, i.e., redeemable and irredeemable preference shares.
What are redeemable preference shares?
Redeemable preference shares are those types of preference shares issued to shareholders with a preference share option implanted, meaning they are redeemed or repurchased later by the company.
It is one of the best methods companies enclose to return cash to their existing shareholders. Moreover, it is a way of share repurchasing but is different from traditional share repurchases in a certain way.
What are Irredeemable preference shares?
The irredeemable preference shares are unlike redeemable shares. They can not get money back invested in the company. Therefore the amount is redeemed only at the time of the company’s liquidation. The agreement doesn’t show anything regarding the money-back policy. In comparison, the irredeemable shares become a permanent liability of the company once invested until the company’s stability.
Limitation of Redeemable Preference Shares
- The company can only redeem shares if it has issued redeemable shares earlier. Otherwise, the company does not have the option to redeem its shares.
- The company needs to wait until the time after which it can exercise the option of redeeming its shares. Moreover, the company needs to wait for the current market price to be favorable to redeem the shares.
Comparison between redeemable and irredeemable preference shares
Conclusion
The main difference between redeemable and irredeemable shares is their ability to repurchase by the issuing company. However, they still have several features common to the preference share, both redeemable and irredeemable shares that enjoy the preferential right to dividend and claim of assets at the time of liquidation compared to equity. While their position falls between debit instruments and equity shares concerning their obligation for repayment.
Marjina Muskaan has over 5+ years of experience writing about finance, accounting, and enterprise topics. She was previously a senior writer at Invyce.com, where she created engaging and informative content that made complex financial concepts easy to understand.
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