What are Redeemable Preference Shares?

Redeemable Preferences shares are type of preference sharesType Of Preference SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more issued to shareholders with a callable option embedded, meaning they can be redeemed later by the company.

  • It is one of the methods companies embrace to return cash to the existing shareholders of the company. It is a way of share repurchasing but is different from traditional share repurchases in certain ways.The prices at which companies can repurchase these redeemable shares are already decided during issuing those shares.Issuing callable preference shares that can be redeemed in the future provides the company flexibility to choose whether to go for share repurchase or share redemption.

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Simple Example of Redeemable Preference Shares

Let us assume an arbitrary example to see how the shares are redeemed by a company A. Let’s assume that the company used the redeemable preference shares and had a call option for those shares at $180 at the predetermined time frame. Suppose the shares are trading at the market price of more than the callable price. Here the company can call the redeemable preference shares when the price of the company is lesser than the call price. And the company can go for share repurchases instead of redeeming the shares. If they cannot secure a share repurchase, they can always fall back on the option of redeeming the shares. That way, the company has greater flexibility if it has issued redeemable shares.

Practical Example

If any, the redeemable preference shares are reported by the company in its balance sheet in the shareholder’s equity section. Below is the snapshot of the shareholder’s section of the balance sheet where the information of redeemable preference shares is reported by the company.

In the example depicted here, two sets of redeemable preference shares exist. One of them is 4000 in the count of shares.

  • The coupon rate paid by the company for these redeemable preference shares is 10%.For the other, the share count is 2000. The coupon rate paid by the company for these redeemable preference shares is 9%.

Advantages of Redeemable Preference Shares

The advantages of redeemable preference shares are as follows-

Disadvantages of Redeemable Preference Shares

The disadvantages of redeemable preference shares are as follows-

  • These kinds of shares are feasible for the companies to redeem only when the call price of the shares is lower than the current market price. Otherwise, it’s logical for the company to go for share repurchases instead.The company needs to wait for the time predetermined while issuing the shares before being able to redeem the shares.

Limitations of Redeemable Preference Shares

The limitations of redeemable preference shares are as follows-

  • 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. The company also needs to wait for the current market price to be favorable to redeem the shares.

Important Points to Note

Important points regarding Redemption of Preference Shares-

  • The company can only redeem shares if it has issued redeemable preference shares. Otherwise, the company does not have the option to redeem its shares.Suppose a company has issued redeemable preference shares. In that case, it provides the company with an option to choose between whether to repurchase shares or redeem shares depending on the market condition.

Conclusion

This has been a guide to Redeemable Preference Shares and its definition. Here we discuss Redeemable Preference Shares with simple and practical examples, advantages, disadvantages & limitations. You may learn more about finance from the following articles –

  • Callable Preferred Stock DefinitionNon-Cumulative Preference SharesEquity Shares vs Preference SharesPreferred Dividend FormulaShareholders Loan