ISSUE & REDEMPTION OF PREFERENCE SHARES

No company limited by shares shall, after the commencement of the companies act, 2013. Issue any preference shares which are irredeemable.

A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed.

The redemption of preference shares implies the repayment to the shareholders either at a fixed date or within a time frame. Preference shares can be redeemed only if it is fully paid-up. The shares are redeemed out of the profits that are available for distribution to its shareholders or from the fresh proceeds issued for funding the redemption of preference shares.  

Preference shares, commonly referred to as preferred stock.

Shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. Preferred stockholders also typically do not hold any voting rights, but common shareholders usually do.

According to Section 55(2) of the Act, a Company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue.

Section 55 of the Companies Act, 2013 (‘Act’) read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 allows a Company to issue redeemable preference shares. Section 55(1) puts ban on issuance of irredeemable preference shares.

PROCESS FOR ISSUE OF PREFERENCE SHARES.

Preference shares are equity shares which hold a certain degree of priority benefits means equity shares with added benefits. The holder of this type of stock gets preferential treatment from the company in the form of release of dividend in first priority (as they receive dividends before other equity shareholders.) 

The right of preference shareholders are not just limited to getting the dividends on priority. They also get the preferential treatment while receiving the share capital in case of liquidation of the company. However, this payment is made to them after paying off all the dues of the existing creditors of the company.

In other words, preference shares are the shares that carry or would carry a preferential right with respect to:

  1. Payment of dividend, either fixed amount or at a fixed rate and
  2. Repayment of the amount of paid-up capital share capital paid up or deemed to have been paid up, in the scenario of winding up of the company or repayment of capital.

As per the explanation mentioned in the companies Act’s section 42, the term is explained as the equity which brings preferential rights to the shareholders in the following manner.

The dividend is paid on priority basis weather its fixed or at a certain rate

The repayment of share capital in case the company gets dissolved due to debts. The repayment is done from the capital left after payment of debt.

Benefits of the preferential share is a higher rate of dividends compared to ordinary equity shares. The company can only issue these shares if they are a part of the authorized share capital as per the MOA of the firm. So before a company decides to issue preference shares or not. If it doesn’t and the company still wants to issue these shares, then they must make amendments to the said document by calling a board meeting.

 Another benefit that some companies grant with the preference shares is sharing of surplus profits of the company after paying dividends to the shareholders of equity shares. 

PREREQUISITES FOR THE ISSUE OF PREFERENCE SHARES

There are few checkpoints that need to be observed and thereafter the issue process for preference shares can be initiated. 

  1. Check whether the nominal capital of the company is bifurcated into equity share capital and preference share capital.
  2. Review the articles of association to verify that there are provisions enshrined relating to the issuance of preference shares.
  3. Take note that there are no subsisting defaults in the redemption of preference shares already issued at the time of making an issue of preference shares.
  4. Ensure that there are no subsisting defaults in the payment of dividend due on any preference share at the time of issue of preference share.
  5. The preference shares proposed to be issued cannot be irredeemable. The preference shares can be issued for tenure of maximum 20 years, except in case of infrastructure projects. However, in that case also, a particular percentage of the shares should be redeemed on annual basis.
  6. There should not be any defaults in payment of dividend or redemption of preference shares already issued.
  7.  In the capital clause of the company the nominal capital should be divided into equity and preference Shares. The Company should be authorised by its articles of association for issuing the preference shares.

Once these aforementioned prerequisites are satisfied then the process for the issue of preference shares can be initiated.

CONDITIONS FOR ISSUE OF PREFERENCE SHARES

 At the time of issuing preference share, there are a few conditions which need to be taken care of and thereafter complied in true letter and spirit. In light of the same the conditions for the issue of preference share are as follows:

  1. The issue of preference shares must be authorized via a special resolution passed in a general meeting of the company.
  2. Fulfil the prerequisites as already discussed above.
  3. The company issuing preference shares should maintain a register under Section 88 of such preference shareholders containing therewith the respective particulars of such shareholders 

TENURE FOR PREFERENCE SHARES

As per section 55 of the Act, a company can issue only redeemable preference shares i.e. a company is not allowed to issue irredeemable preference shares. On this note, it is mandatory for every company issuing preference shares to redeem them within a period of 20 years from the date of issue. 

Having discussed the types of preference shares; prerequisites for issue of preference shares; conditions for issue of preference shares and the time span for preference shares now let’s head towards highlighting the detailed process for the issue of preference shares.

A company may issue preference shares for a period exceeding 20 (Twenty) years for infrastructure projects. Subject to the redemption of a minimum 10% of such preference shares per year from the 21 (twenty-first) year onward or earlier, on a proportionate basis, at the option of preference shareholder.

STEPWISE PROCESS FOR ISSUE OF PREFERENCE SHARES

Sr No.StepCompliance Required
1Issue notice of board meetingThe first step for issue of preferential allotment is issue of notice at least 7 days before meeting to all directors of the Company.
2Conduct of BoardConduct board meeting on decided date, time and place and pass resolutions as follows-For alteration of share capitalApproval of offer letter for Issue of Preference shares along with explanatory statement containing-No. of Preference, Nominal Value of the SharesType of preferential allotmentTerms of issue, rate of dividend, terms & tenure of redemption.Price at which shares are proposed to be issued & and method of valuation.
3Issue notice of Extra Ordinary General Meeting (EOGM)The next step is to issue notice of EOGM at least 21 days before meeting
4Conduct of EOGMPass a special resolution for Preferential allotment of Shares along with following informationPayment of dividend on cumulative/non-cumulative basis.Conversion of preference into equity.Voting rights (limited to the matters related to preference shareholders only).Terms of redemption.
5Dispatch of Offer letter in form PAS-4Issue offer letter within 30 days of General Meeting/recording the name of such person.Offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.Offer Letter despatched either in writing or electronic mode. 
6Filling of form SH-7 and MGT-14File SH-7 with Registrar within 30 days of passing of Special Resolution for ReclassificationFile MGT-14 with Registrar within 30 days of passing of Special Resolution.Documents:Notice of General Meeting along with Explanatory Statement.Certified True copy of Special Resolution.Minutes of General Meeting Altered MOA 
 RECEIVE ACCEPTANCE/RENUNCIATIONS/REJECTION OF RIGHTS FROM MEMBERS TO WHOM THE OFFER HAS BEEN SENT & ALSO FROM PERSONS IN WHOSE FAVOR RIGHT RENOUNCED
7Open Separate Bank AccountA separate bank needs to be opened by the Company. The money so received for allotment shall be kept in a separate bank account of the company and utilized only for allotment (or repayment).
8Call Board MeetingA board meeting needs to be called after receiving allotment money.
9Conduct of Board MeetingHold board meeting along with-Present List of Allottees before the Meeting.Pass Board Resolution for allotment of shares (within 60 days of receiving of money).Pass Resolution for issue of Share Certificate in same Meeting.Authorize to two directors and a authorize person to sign share certificate. 
10 File Form PAS-3Form PAS-3 needs to be filed with ROC within 15 days from the date of allotment.DocumentsList of AlloteesBoard Resolution for allotment of Shares.
11.Issue of Share CertificatesShare certificates in form SH-1 shall be issued within 2 months from the date of allotment of shares.

REDEMPTION OF PREFERENCE SHARES

In consideration of the above, the preference shares shall be issued up to a maximum of 20 years or 30 years in case a company sets up infrastructure projects. It is clear that before expiry of the term the shares should be redeemed or converted into equity shares depending on the terms and conditions. The following are the important provisions regarding redemption of preference shares: –

The preference shares shall be redeemed out of profits available for distribution of profits or out of the proceeds of fresh issue of shares made for the purpose of redemption.

No preference shall be redeemed unless they are fully paid up.

In case the preference shares are proposed to be redeemed out of profits of the company then the equivalent amount should be transferred to a reserve called ‘Capital Redemption Reserve Account’.

The premium if any payable at the time of redemption of preference shares shall be paid out of the profit of the company or out of securities premium account.

Only fully paid preference shares are allowed to be redeemed.

Preference shares shall be redeemed out of the following:

Profits of the company which would otherwise be available for dividend or

Out of the proceeds of a fresh issue of shares made for the purposes of such redemption; Fresh issue of shares can be of equity as well as preference or can be both

It is important to note that redemption of preference shares shall be made only from the following:

i) Out of the profits of the company which would otherwise be available for dividend.

ii) Out of the proceeds of a fresh issue of shares made for the purpose of such redemption.

FOLLOWING PROCEDURE IS TO BE FOLLOWED
  1. Convene a Meeting of Board of Directors [As per section 173 & SS-1]
  2. PAYMENT OF REDEMPTION AMOUNT
    Company shall make the payment of the redemption amount and the premium amount (if any) to the redeemable preference shareholders.
  1. RELEVANT ENTRIES IN THE REGISTER OF MEMBERS
    Company shall make necessary entries in the Register of Members in Form MGT-1 within 7 days from the date of Board Meeting in which the redemption was approved.
  2. FILE NOTICE FOR REDEMPTION OF PREFERENCE SHARES
    Company shall file a notice for the redemption of preference shares with ROC in Form SH-7 within 30 days from the date of such redemption along with the copy of Board Resolution authorizing redemption of redeemable preference shares.
  1. TRANSFER OF AMOUNT TO CAPITAL REDEMPTION RESERVE ACCOUNT
    Where the company has redeemed the preference shares out of the profits of the company then a sum equal to nominal amount of the redeemed preference shares shall be transferred to the Capital Redemption Reserve Account (CRR).

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