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Redeemable and irredeemable preference shares

When it comes to raising money through shareholding, companies have the option to issue different types and forms of shares. while these types, there are shares called preference shares which companies issue to raise money. Preference shares 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 development date on which date the company will repay the capital amount to the preference shareholders and discontinue the dividend payment therefore at the same time. While irredeemable preference shares are a limited difference from other types of preference shares. , It does not have any maturity date, which makes this instrument the same as equity, except that the dividend of these shares is fixed.

They enjoy preference in paying both dividends and capital over the equity shares. Since there is a lack of maturity, they are also known as perpetual preference share capital.

This article looks at the meaning and differences between two types of preference shares i.e redeemable and irredeemable preference shares.

Table of content

  • What are redeemable preference shares?
  • What are Irredeemable preference shares?
  • Advantages and disadvantages of redeemable preference shares
  • Limitation of redeemable preference share
  • Comparison between irredeemable preference shares and  redeemable preference shares
  • Conclusion

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 the way of share repurchase 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 a money-back invested in the company. Therefore the amount is redeem only at the time of the company’s liquidation. The agreement doesn’t show anything regarding the money-back policy. It doesn’t provide any benefits or profits to the company. In comparison, the irredeemable shares become a permanent liability once it is invested till the stability of the company.

Advantages and Disadvantages of Redeemable Preference Shares 

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. While 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 also needs to wait for the current market price to be favorable for it 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. Therefore irredeemable preference shares have no option to redeem later.
They are buying back Redeemable shares can buyback at any time. 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 The 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 the permanence.
     

Conclusion

The main difference between redeemable and irredeemable preference shares is their ability to repurchase by the issuing company. However, they still have several similar 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

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