Malaysia’s investment landscape is burgeoning with opportunities, offering a plethora of options for savvy sophisticated investors seeking to diversify their portfolios. Among these opportunities, Redeemable Preference Shares (RPS) and its Islamic counterpart, RPS-i, have emerged as significant focal points. Positioned as a unique hybrid between equity and debt instruments, these offerings promise a blend of stability and returns, ideal for investors aiming to fortify their investment strategies.
Boasting preferential treatment in dividend payouts and capital distribution during liquidation, RPS provides a sense of security amidst market volatility. Its redeemable feature, a departure from the perpetual nature of traditional preference shares, offers investors a clear exit strategy, perfectly aligning with long-term investment goals. Furthermore, the allure of higher dividend yields appeals to income-oriented investors, providing a stable income stream in uncertain financial environments.
Understanding the Appeal of Preference Shares for Investors
Investors opt for preference shares for various reasons, often driven by their unique characteristics and benefits. Firstly, preference shareholders typically do not seek voting rights or involvement in the company’s management. Instead, they prioritize financial returns over corporate governance participation. These investors rely on their independent assessment of the company’s performance, trusting that they will benefit from predetermined dividend payments or attractive returns on investment according to subscription terms.
Moreover, preference shareholders enjoy priority over a company’s income distribution. This means they are often entitled to receive dividends before ordinary shareholders. Additionally, in the event of a company winding up, preference shareholders benefit from stronger bankruptcy protection, leveraging the concept of preferential payments. These factors contribute to the appeal of preference shares among investors seeking stable returns and protection of their investment interests.
Types of Preference Shares
Various types of preference shares cater to diverse investment preferences and risk profiles. Commonly known terms include redeemable convertible preference shares, redeemable cumulative preference shares (RPS), or redeemable convertible cumulative preference shares (RCCPS), each serving specific investor needs.
Cumulative preference shares guarantee preferential dividends from the date of issuance, accumulating unpaid dividends for future settlement, ensuring stability and consistent income streams. In contrast, non-cumulative preference shares do not accrue dividends from previous periods if not declared, posing higher risks regarding dividend reliability compared to cumulative shares.
Redeemable preference shares, or callable shares, allow the issuer to repurchase them at a predetermined price after a specified period, offering flexibility for companies to manage their capital structure. Conversely, non-redeemable shares, or irredeemable shares, represent permanent equity ownership without the option for repurchase, providing long-term investment opportunities with potential for higher returns but subject to market fluctuations.
Participating preference shares entitle holders to additional dividends based on the company’s financial performance, offering potential for higher returns during prosperous periods.
Convertible preference shares offer the option to convert into common shares, providing opportunities for capital appreciation and participation in the company’s growth, albeit subject to specified conditions. Conversely, non-convertible shares lack conversion features, remaining as permanent equity stakes in the company.
Why Companies Issue Preference Shares?
Many companies opt to issue preference shares as a structured method for raising funds to bolster guaranteed projects and to rebalance their share portfolios. This strategic approach allows corporations to secure financing for specific ventures while maintaining flexibility in their capital structure. Additionally, issuing preference shares provides companies with an alternative avenue for capital infusion, enabling them to diversify their funding sources and mitigate risks associated with overreliance on debt financing or common equity issuance. Notable Malaysian companies who have issued this instrument include G Captial Berhad, SP Setia Bhd, Telekom Malaysia Berhad, FGV Holdings Berhad, Qew Group Berhad and many more.
Beyond individual investor benefits, RPS and RPS-i play a pivotal role in driving economic growth and development in Malaysia. By offering companies an alternative avenue for raising capital, these investment instruments fuel innovation, drive entrepreneurial endeavors, and contribute to job creation. The injection of funds into promising ventures not only benefits shareholders but also enhances the vibrancy of the economy, fostering productivity and competitiveness on regional and global scales. In essence, RPS and RPS-i serve as catalysts for progress, propelling Malaysia towards greater economic prosperity.
The introduction of RPS-i, adhering to Islamic principles, adds another layer of consideration. While catering to Shariah-compliant investors, RPS-i introduces a distinct set of considerations, including compliance with Islamic financing principles. As investors weigh the pros and cons of these investment instruments, due diligence emerges as the guiding principle, empowering individuals to make informed decisions amidst the complexities of financial markets. While RPS and RPS-i offer the potential for lucrative investment opportunities and economic progress, understanding these vehicles remains crucial for safeguarding investors’ interests in an evolving economic milieu.
While there are several advantages of preference shares, it’s important to be aware of the associated risks:
- Interest rate risk: The fixed dividends on preference stocks can become less attractive in a rising interest rate environment, as other investments may offer higher yields.
- Lack of voting rights: Preference shareholders do not have a say in the company’s decisions, which can be a disadvantage if the company’s management makes unfavourable choices.
- Market performance: The performance of preference stocks can be influenced by market conditions, and their value may fluctuate accordingly.
- Call risk: If you hold redeemable preference stocks, there’s a risk that the company may choose to redeem them, potentially leaving you with fewer investment opportunities.
