January 29, 2022

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Meaning of Non Convertible Preference Shares and Key Explanations

Meaning of Non Convertible Preference Shares and Key Explanations
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Preference shares are used mostly by private limited liabilities companies. Through this medium, these entities can raise capital for business growth or to finance new projects, processes or products and services. Whatever the reason, this article focuses on non convertible preference shares. To learn more about other types of preference shares, you can click on the link.

Definition — What really is Non Convertible Preference Shares

If you can define a convertible preference stock, then it isn’t difficult to define the aforement. It is simply a type of preference stock that doesn’t have the right to change its form to ordinary shares. It can as well mean, a share type whose holders are not given the right to convert to ordinary shares. This shares enjoys the same features with other preference shares and can be combined with redeemable shares in some countries.

Read: Meaning of Non-Participating Preference shares with key Explanations

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Key Explanations

A type of Preference Shares. It is among other types of preference shares already discussed in sbaccounting NG. You May like to read specifics, then check redeemable, non cumulative and participating preference shares. However, this stock is unique in its own ways.

Meaning of Non Convertible Preference Shares and Key Explanations

Non convertible right. What differentiates it from others is its non convertible right. Holders are aware that, in the case of management’s decision to convert certain capital to ordinary shares, they are not entitled to it. Therefore, such holders will only get their investment if they sell it to a third party or when the entity liquidates.

However, most non convertible preference stocks are combined with redeemable shares and stated as “redeemable non convertible preference shares.” This gives the holder of this right to redeem their investment upon management decision to do so or when the contract term expired. Note that most redeem shares have a maximum of 20 years to get back their investment.

Other Features of Non Convertible Preference Shares

It has similar features with other preference shares. This includes:

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Fixed dividend. Here, the holder received fixed income. The percentage attached to the shares remained fixed. If 9 percent is the dividend payment, then, that’s what will be paid to the shareholders at any point in time. The problem is the investment cannot mitigate against inflation unless there is a way to compound it.

Read: Five differences between Ordinary (common) Shares and Preferences shares explained

Voting right. This doesn’t have voting rights. During the company’s annual general meeting, the holder cannot vote for or against a decision made by the board members. He cannot send a proxy to such a meeting.

On liquidation. When the business liquidates, the holders of non convertible preference shares can expect their money invested before ordinary shareholders. Also, on merger and acquisitions, the holders will also receive the value of their investment in full.

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Conclusion

In summary, a non convertible preference share doesn’t have the right to convert to ordinary capital. However, it can be combined with other types of preference stocks. It also enjoys the same features with others. Fixed income does not give the shares the power over inflation unless there is a way to compound it.

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