Conversion of equity into preference shares

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

21 May 2018 Hi,
If one Pvt ltd. has Authorised and Issued capital of Rs. 5,00,000. Now one director want to issue 1% preference to other person out of his shares. Is it possible in Companies Act, 2013 as company has only one class shares and not have any unissued share capital.
what is procedure and what is best way in this scenario.

Thanks

Nikhil Kaushik

Nikhil Kaushik (Expert)
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21 May 2018 you will have to add another class of shares - Preference shares and then issue it to the new person. this would require necessary changes in the MOA and then normal compliance for the issue of shares.

Querist : Anonymous

Querist : Anonymous (Querist)

21 May 2018 Sir, I didn't get you properly . How to add another class of shares ??
It means we need to increased authorized share capital in other class and issue to other person ??
correct me if i m wrong?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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20 July 2024 In the scenario you've described, the Pvt Ltd. company currently has only one class of shares (presumably equity shares) with an Authorized and Issued capital of Rs. 5,00,000. Now, one director wishes to issue preference shares to another person, which would constitute a new class of shares. Here’s how you can proceed and the considerations involved:

### Procedure to Introduce Preference Shares:

1. **Amendment of Articles of Association**:
- Check the company's Articles of Association (AOA) to determine if they allow for the creation of multiple classes of shares.
- If the AOA does not currently permit multiple classes of shares, you will need to amend the AOA by passing a special resolution in a general meeting of shareholders.

2. **Increase in Authorized Share Capital**:
- To create a new class of shares (in this case, preference shares), you typically need to increase the authorized share capital of the company.
- This involves passing a special resolution to amend the Memorandum of Association (MOA) to increase the authorized share capital, specifying the new class of preference shares.

3. **Issue of Preference Shares**:
- Once the authorized share capital is increased and the AOA is amended to allow for preference shares, the board of directors can issue the preference shares to the desired person.
- Ensure compliance with the procedures laid out in the Companies Act, 2013, regarding issuance of shares, including valuation, pricing, and documentation.

4. **Compliance and Filings**:
- File necessary forms with the Registrar of Companies (ROC), such as Form SH-7 for increase in authorized capital and Form PAS-3 for issuance of shares, within the prescribed timelines.

### Considerations:

- **Valuation of Preference Shares**: Determine the valuation method for the preference shares to be issued, as per guidelines under the Companies Act.
- **Rights and Conditions**: Clearly define the rights, privileges, and conditions attached to the preference shares in the new AOA provisions and the share issuance documents.
- **Shareholder Approval**: Obtain approval from shareholders through a special resolution for amendments to the AOA and increase in authorized share capital.
- **Legal and Tax Implications**: Consult with legal and tax advisors to understand the implications of introducing a new class of shares on corporate governance, taxation, and compliance.

### Conclusion:

To add a new class of shares (preference shares) in your Pvt Ltd. company, you need to follow a structured process involving amendment of AOA, increase in authorized share capital, and issuance of shares. Ensure compliance with all regulatory requirements under the Companies Act, 2013, and seek professional advice to navigate the process smoothly and effectively. This approach will help in legally introducing preference shares and expanding the capital structure of your company.