Preference Dividend refers to the fixed amount of dividend paid to holders of preference shares before any dividend is distributed to equity shareholders. It is a key feature that distinguishes preference shares from equity shares, as it ensures a steady return to investors and a lower level of risk compared to ordinary shareholders. Companies pay preference dividends at a predetermined rate, usually expressed as a percentage of the face value of the share.

From an investorís standpoint, preference dividends provide predictable income, making preference shares a hybrid instrumentóoffering both equity ownership and debt-like stability. These dividends are paid out of the companyís profits, but unlike interest on debt, they are not a legal obligation. If a company faces financial distress or has insufficient profits, it can defer or skip preference dividends, particularly in the case of non-cumulative preference shares.

There are mainly two types of preference shares based on dividend entitlement: cumulative and non-cumulative preference shares. Cumulative shareholders are entitled to receive unpaid dividends in the future when profits improve, while non-cumulative shareholders lose their right to unpaid dividends if not declared in a given year. Additionally, participating preference shares may receive extra dividends if the company performs exceptionally well.

From a corporate finance perspective, issuing preference shares helps companies raise capital without diluting voting control, as preference shareholders usually have limited or no voting rights. However, these dividends reduce the available profit for equity shareholders and may signal a fixed financial commitment similar to debt servicing.

In summary, preference dividends play a vital role in balancing investor expectations and company financing strategies. They provide stability and predictability for investors while allowing companies flexibility in capital structuring within the regulatory framework of SEBI and the Companies Act, 2013.