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.
Table of Contents
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.
| Advantages of Redeemable preference shares | Disadvantages of Redeemable preference share |
|---|---|
| The redeemable preferential shares often provide exit opportunities for venture capital funds, which also offer a predetermined way out option at a predetermined time and price point. | The company needs to wait for the time predetermined while issuing the share before being able to redeem the share. |
| The company also redeems shares when it decides to pay back the shareholders. Moreover, it is an important way of paying the shareholders, comparable to paying dividends. When the company redeems its shares, the total number of shares outstanding reduces for the company, and the earnings per share or the company’s EPS increases, which leads to an increase in the share price. | These kinds of shares are reasonable for the companies to redeem only when the price call of the shares is lower than the shares’ recent market price. While otherwise, it’s logical for the company to go for share repurchases instead |
| Issuing redeemable preferential shares allows the company to choose between repurchasing shares or redeeming shares depending on the market condition. |
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
| Comparison of parameter | The redeemable preference shares | Irredeemable preference shares. |
|---|---|---|
| Definition | These are the shares that are redeemed or repurchased after the expiry of the fixed time period. | These are the shares that have no option to redeem later. |
| Buying back | Redeemable shares can be buyback after maturity. | while irredeemable shares are repurchased only at the liquidation of the company. |
| Benefits | Provide more benefits to the company. | Provide fewer benefits to the company. |
| Perpetuity | stability does not exist in redeemable shares | while stability lives in irredeemable shares. |
| Continuity | Dividend parts exit until money won’t be received back. | Dividend parts live till permanence. |
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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