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Demerits

The shareholders suffer serious disadvantages such as (a) vulnerability to arbitrary managerial action as they cannot enforce to dividend right to payment in case of redemption. and (b) modest dividend in the context of the associated risk. For the company, the preference capital is an expensive source of finance due to non-tax deductibility of preference dividend.

In brief, preference capital (i) involves high cost (ii) does not dilute control (iii) has negligible risk and (iv) puts no restraint on managerial freedom.The share holders receive modest returns and are vulnerable to arbitrary managerial actions. It is not a popular source of long-term finance in India.

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