Preference capital represents a hybrid form of financing – it takes some characteristics of equity and some attributes of debentures.
It resembles equity in the following ways:
(i) Preference dividend is payable only out of distributed profits
(ii) Preference dividend is not an obligatory payment (the payment of preference dividend is entirely within the discretion of the directors)
Preference capital is similar to debentures in several ways:
(i) The dividend rate of preference capital is usually fixed
(ii) The claim of preference shareholders is prior to the claim of equity shareholders
(iii) Preference shareholders do not normally enjoy the right to vote