Going public and the dividend policy of the company

Going public and the dividend policy of the company

Types of Shares

There are two main classes of shares are ordinary and preference

Ordinary shares (sometimes called ‘equity’ shares)

Those are the highest risk-takers shares in the company. This implies that the holder’s claims upon profit – for dividend, and assets – if the company is liquidated, are deferred to the prior rights of creditors and other security holders. However, the capital liability of ordinary shareholders is limited to the amount they have agreed to subscribe on their shares, therefore they cannot be called upon to meet any further deficiency that the company may incur. If the ordinary shares are the voting (controlling shares) but in some companies the significant proportion is held by the directors and the remainder are widely held by a large number of shareholders, so the directors may effectively control the company.

Preference shares

They also are the part of the equity ownership, attractive to risk-averse investors because of their fixed rate of dividend, which normally must be at a higher level than the rate of interest paid to lenders, because of the relatively greater risk of non-payment of dividend. Whilst they are part of the share capital, the holders are not normally entitled to a vote, unless the terms of issue specified overwise, and even then votes are usually only exercisable when dividends are in arrears. Preference shareholders have prior rights to dividend before ordinary shareholders, but it may be withheld if the directors consider there are insufficient resources to meet it. There is an implied right to accumulation of dividends if they are unpaid, unless the shares are stated to be non-cumulative. Payment of such arrears has priority over future ordinary dividends. And if the company goes into liquidation, preference shareholders are not entitled to payment of dividend arrears or of capital before ordinary shareholders, unless their terms of issue provide otherwise, which they usually do.

Companies have issued three varieties of preferences shares from time to time, to confer special rights; these are redeemable preferences shares, participating preferences shares and convertible preferences shares. Redeemable preferences shares are similar to loan capital in that they are repayable but they lack the advantage enjoyed by loan interest of being able to

charge dividend against profit for taxation purposes, participating preferences shares enjoy the right to further share in the profit beyond their fixed dividend, normally after the ordinary shareholders have received up to a state percentage on their capital, convertible preferences shares give the option to holders to convert their shares into ordinary shares at the specified price over a specified period of time.

The Stock Exchange and the Capital Market

The Capital Market embraces all the activities of financial institution engaged in:

the raising of finance for private and public bodies whether situated in UK or overseas (the primary market);

trading the securities and other financial instruments created by the activity above (the secondary market).

The Stock Exchange plays a central role in this international market. It provides the primary facility fir marketing new issues of shares and other securities, and also a well-regulated secondary market in shares, British government and local authority stocks, industrial and commercial loan stocks and many overseas stocks that are included in its Official List. Nowadays it called the London Stock Exchange Ltd is an independent company with the Board of Directors drawn from the Exchange’s executive, and from the customer and user base.

The main participants on the Stock Exchange are Retail Service Providers (RSPs) and the stockbrokers. The function of RSPs is to provide a market in securities, which they have nominated, and to maintain two-way prices, i.e. lower price at which they are prepared to buy and a higher price at which thy will sell. And stockbrokers can act for client as agent only, when purchasing or sell securities on their behalf, in which case they deal with RSPs. And dual capacity stockbrokers/dealers, however they will buy and sell shares on their own account, and may act as both agent and principal in carrying out clients ‘buy’ and ‘sell’ instruction. Unfortunately the integration of the broking and dealing functions within the same financial grouping can give rise to conflict of interest, and this has made it essential to create a protective regulatory framework both within and between financial institutions.