Preferred shares - a common financial instrument in Russia and in the world. It allows the owner to receive a guaranteed income based on dividend rates offered by the issuer of securities.
Also, in some cases, the holder of such shares may influence the company's development strategy. What are the distinguishing features of preferred assets in relation to bonds and securities classified as ordinary? What are the advantages of the owner of this type of shares? What are the possible restrictions on his rights in relation to participation in the management of the company?
Definition
Preferred shares are securities whose holders hold an extended range of rights in comparison with holders of ordinary assets. However, even taking into account the special status of the owners, some restrictions are possible. Enterprises that issue preferred shares, on the whole, set the same goal as when issuing the usual type of securities - raising funds to replenish the authorized capital. An interesting property of the shares in question is that they have a number of features that are also characteristic of bonds.
Another factor - preferred shares of a joint-stock company can be issued due to the company's desire to achieve a balance between equity and external - without increasing the number of holders of securities that have voting rights (we will consider this aspect below). Thus, the assets in question are gaining quite a lot of popularity among Russian entrepreneurs.
Features of preferred shares
Preferred stocks can have a number of advantages for the investor when compared with ordinary securities. What are the possible preferences for the holder in question?
Firstly, almost always the owner of preferred shares is guaranteed a certain income.
Secondly, cash for dividend payment is allocated to the holders of such securities as a matter of priority (this is especially important in cases where, for example, a company is liquidated and liabilities remain).
Thirdly, dividends on shares referred to, usually recorded in the total net profit. At the same time, privileged-type securities, as a rule, do not allow the owner to participate in the management of the company, to “vote” for any decisions. Another nuance is that stocks of this type, as a rule, have less potential in terms of price growth. However, the holder of such stocks is de jure - co-owner of the company. Despite the fact that the holder of such securities does not have the right to vote, he can participate in meetings of shareholders and claim a share of the property upon liquidation of the organization.
Holders Rights
We study the aspect that reflects the rights of owners of preferred shares. The securities in question are classified as equity. That is, they have signs of similarity with ordinary stocks. Holders of a privileged type of securities, along with the main shareholders, receive a share in the authorized capital of the company, and, as we said above, have the right to attend general meetings.
At the same time, additional conditions may exist for the relationship between the issuer of shares and their acquirers. This is usually specified in the contract. It is quite acceptable, by the way, that the firm will still allow the holder of preferred securities to vote. True, in many cases this in practice means that the “weight” of the vote will be rather nominal.
By the way, the laws of several countries, including Russia, explicitly state that preferred shares can be issued with or without a vote. In some European countries, there are mechanisms in place whereby the holder of a security of this type may, in a number of circumstances, even have a double voting right (for example, if a registered share is held for a long time).
Voting Permit
However, in the general case, the rights of holders of preferred shares do not allow their voting. An exception may be cases when decisions made in the relevant negotiations affect the personal interests of securities owners.
In particular, in the Russian legal acts regulating the issue of preferred shares, it is said that if especially important issues are on the agenda of the meeting, holders of preferred assets can vote. Which ones? These may be issues reflecting the procedure for a possible reorganization of a company or liquidation of a company, those related to amendments to the Articles of Association, which are related to the rights of holders of preferred shares or, for example, to the payment of dividends. Many experts refer to those issues that are related to the value residual value new issues.
Ordinary shares and privileged in terms of the rights of their owners have one major difference. The point is that obligations on securities of the second type are performed by the issuer in a preemptive manner.
Dividends are first paid to the owners of the preferred shares, and only if there is enough property and other assets of the company, settlement is made with holders of ordinary securities.
During liquidation, and we have already noted this above, the same pattern. True, in this case, other subjects of financial relations — creditors and bondholders — have an even higher priority. Obligations to them, when the company is liquidated, are repaid first.
Stock classification
What are the types of preferred shares? Economists distinguish the following. There are cumulative preferred shares. Their peculiarity is the accumulation of dividends - they are not subject to periodic payment.
There are, in turn, non-cumulative securities. Their specificity is that dividends that are not paid do not accumulate.
There are participating preferred shares. Their holder is entitled to receive increased dividends in the event that the value of the ordinary type of securities exceeds a certain level.
There are also convertible shares - they can be converted into other types of securities.
There are revocable assets (also called redeemable). They are characterized by the presence of the company's obligation to the holder in the form of mandatory repayment at a certain time.
Some types of preferred shares may be characterized by the possibility of changing dividend rates - in which case they form a separate type of securities.
If the obligation to pay to the holders of shares is legally carried out not by the issuer, but by another company, then this type of asset is classified as guaranteed.
There are also shares in which the option rule is applied - this allows the holder of the security to sell it to the issuer at a fixed cost.
Emission
As a rule, joint-stock companies are entitled to issue several varieties of preferred securities at once. Moreover, each of the types of shares may differ both in nominal value and in the amount of dividends, the timing of their payment, etc.
However, if the company intends to issue several types of preferred securities, then its constituent documents should reflect information on the priority of dividend payments regarding each type of asset. Also in this kind of sources should be specified the rights of holders of preferred shares.In particular, those that reflect the right to vote.
We noted above: despite the fact that the owners of this type of securities, as a rule, cannot vote, this kind of preference in some cases is still allowed by the issuer. At this it far from always connected with the main purpose of the issue, namely the attraction of additional capital.
Some companies have a practice - the issue of shares is initiated mainly for the purpose that the very right to vote was obtained by the founders. That is, the holder of a security, thus, becomes both a full-fledged subject of enterprise management, and a person who has privileges in paying dividends. However, as many experts note, such a scheme is more likely an exception to the rule, since investors may not like this type of fraud.
Difference from bonds
We said above that privileged shares reflect an intermediate position between ordinary securities and bonds.
What is this expressed in practice? The main criterion for distinguishing here is in holder status. As we have already noted, the owner of a share is one of the owners of the company.
In its turn, the holder of a bond, from a legal point of view, is a creditor. In the first case, dividends on preferred shares are paid, in the second - interest payments.
The obligation of the company to pay the holder of preferred shares is relatively conditional. That is, if, say, the company goes bankrupt, and the remaining assets are not enough to pay the holders of the securities, the holder of the share cannot recover what is put through the court. In turn, the bondholder has every right to claim his debt in court.
Legislative aspect
What are the features of the legal regulation of the issue of preferred shares in Russia? It can be noted, for example, that the legislation of the Russian Federation contains a number of restrictive norms. In particular, the share of preferred shares in Russian enterprises, based on their face value, may be no more than 25% of the total authorized capital of the company.
The number of units of securities is of no practical importance. It may well be that nominal cost preferred shares will be more than the same indicator for ordinary assets. And therefore, the share of such securities, calculated in real amounts, will exceed the percentage expressed in the number of units of shares.
Dividends
One of the criteria for classifying the securities in question is the method of calculating dividends. There are shares where the corresponding payments are fixed, and there are those that allow additional accruals. In the first case, the size of the dividend on preferred shares, thus, remains constant throughout the entire period of the contract. The yield is methodologically determined either in monetary terms or as a percentage of the current value of the security.
The characteristics of the shares in question that are generally recognized among experts are fixed income. That is, the case when dividends are accrued at floating rates is rather an exception. At least the first option appeared historically earlier. In the stock markets of developed countries, as soon as the relevant financial institutions appeared, preferred securities were issued only with a constant amount of dividends. So it is now: in many countries, legislation requires issuers to issue shares of this type with fixed income.
In some cases, it is possible that the securities will have an adjustable dividend, based on proportionality with the profitability of shares issued by the state. For example, if the corresponding payments assume quarterly periodicity, then their size is tied to the corresponding volatility on government bonds. This mechanism is used by companies mainly to reduce risks.
There are types of preferred shares in which the dividend rate is determined by the auction principle. In practice, this mechanism looks like this. A broker company (or bank), which carries out the placement of shares, conducts auctions for the purchase and sale of securities of the corresponding type at specified intervals. Those who wish to buy assets submit applications stating the required number of units of shares, as well as the expected amount of dividends.
Having collected all the applications, the broker calculates the optimal yield on the securities. Welcome to the sale of shares is given only to those applicants who have established dividend rates lower than those determined by the broker. At the same time, all auction winners receive shares with the same level of return.
Some experts believe that this type of securities is one of the most attractive for Russian investors. However, according to analysts, there is also a drawback in this scheme - there are not always enough buyers on stocks, as a result of which the broker’s profitability level on orders may be too large for the issuer or the intermediary.
At the same time, the option of emissions is also popular in Russia, in which dividends on preferred shares are paid at floating rates, usually tied to the company's net profit.
Where can one buy
How to become the owner of preferred shares? Most large companies, in principle, are interested in selling their assets to as many buyers as possible. And therefore, now there is no problem in order, for example, to purchase preferred shares of Sberbank or Gazprom from numerous brokers.
It is possible as an option to use the public resources of one of the exchanges on which the corresponding securities of large companies are traded in free circulation - for example, the MICEX. Preferred shares of Sberbank have, like other similar financial instruments, guaranteed profitability (about 4-5%) and relatively low cost - about 50 rubles per share.
