The Definition of Retractable Shares

Retractable preferred share

There are two modes in which a company raises funds, debt and equity. Debt capital is a loan that creditors have provided to the company. They are paid interest periodically on the loan amount.
Equity capital represents possession rights in the company. The company issues shares (stocks) to the holders thereof and pays them dividend income periodically (whenever it makes profits). There are two types of shares, equity and preference shares. Holders of preference shares get preferential treatment in terms of payments of dividends and money at the time of liquidation. Retractable preference shares give the owner an option of sale at a preset value.

Significance

These shares are retractable, meaning they can at any point in time be redeemed for either equity shares or for cash. The associated risks involved with owning preferred shares are less than those associated with owning equity stocks.

Features

Retractable preference shares are a hybrid form of equity capital with some features of debt capital. Though these investors are paid dividends in place of interest, they get preferential treatment. They are always paid before any payment is made to the owners of equity capital. These individuals can freely choose the maturity date.
Also, in the event of liquidation of the firm, the retractable preference shareholder, along with other preference shareholders, is paid first.
Retractable preference shares carry no voting rights.

Benefits

This is a non-volatile investment option. The favoritism for these shareholders mitigates and annuls risks completely.
Also, the holder can exercise the option to sell or exchange these shares at his convenience. There is no binding commitment on the part of the shareholder.

Time Frame

At the time of issue, the company does not set any redemption date. Only the value that the shares would fetch on sale is preset. It is left to the shareholder to redeem these shares whenever he needs cash or wants to hold equity shares.

Limitation

As long as the owners of retractable preference shares hold them, they are paid a constant sum periodically. This works fine as long as the company is making moderate profits. In the event that the company makes huge profits, these individuals are at a loss. After the payment of interest to the creditors of the company and preference shares dividend payments, the remaining amount is distributed to the equity shareholders. These people are rewarded for taking risks.

References

• Investopedia: Retractable Preferred Shares
• Professional Referrals: Preferred shares