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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

A company issues redeemable preference shares carrying a fixed dividend, with no voting rights, redeemable after ten years. Which treatment and feature is most accurate for such a hybrid instrument?

Redeemable preference shares are hybrid: fixed dividends and a set redemption date resemble debt, but they remain share capital, so dividends are paid out of post-tax profit and are not tax-deductible like interest.

  1. AThe fixed redemption obligation gives it debt-like features, though dividends are not tax-deductible under normal Indian tax rulesCorrect
  2. BDividends are tax-deductible interest, exactly like bond coupons
  3. CIt ranks below ordinary shareholders on liquidation
  4. DNon-payment of dividend allows the holder to force immediate liquidation as a secured creditor
  5. It has no fixed return and behaves entirely as equity

Explanation

Redeemable preference shares combine a fixed return and redemption date (debt-like) with legal share status; dividends are paid from post-tax profits and are not deductible. They rank ahead of ordinary shares but behind creditors on winding up.

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