Conversion of equity shares into preference shares
This query is : Resolved
11 January 2012
Hi- I have a specific query that whether any shareholder of a Private Company request to the Board to conver the equity into preference shares which carry fixed rate of dividend.
Now whether it is possible, if yes what should be procedure? if no, which provision restrict it?
Early responce will be higly appreciated.
Now whether it is possible, if yes what should be procedure? if no, which provision restrict it?
Early responce will be higly appreciated.
11 January 2012
Equity is permanent capital, you can reduce it by buy-back and then reissue as preference, but it cannot be converted in preference.
Message likes :
1 times
11 January 2012
Which provisions of Companies Act prohibits such restrictions. If converted what would be the consequence?
12 January 2012
It will amount to reduction of capital hence you have to follow provisions of Sec 100. See Sec 77 also.
12 January 2012
My views on your question are as follows:
1. The equity paid up capital is the base and eternal capital, once issued, can not be taken back unless and until one follows the mechanism of "Reduction of Capital" for partial withdrwal and "Winding up" for withdrwal of leftover.
2. Contrary to the above, Preference shares can be issued for a maximum period of 20 years only (Section 80(5A)) and afterwards have to be compulsorily reedemed. Thus, preference shares are not eternal shares.
3. If we try to issue equity shares convertaible into preference shares, say after 20 years, they will be reedemed and a situation may come that, in 21st year, there won't be any capital avaialble with company, which is again hit by provisions of Section 45. (i.e. no capital = no members).
4. In view of above, issue of convertiable PS into ES looks odd. However, in the senario 3, if the company could issue another class of CPS before 20 years (say in the 18th or 19th year), the technical flaw may be overcome, but how the situation would be viewed by the creditors etc., the financial implications and going cocern concept etc., needs to be checked.
Other views are welcome
1. The equity paid up capital is the base and eternal capital, once issued, can not be taken back unless and until one follows the mechanism of "Reduction of Capital" for partial withdrwal and "Winding up" for withdrwal of leftover.
2. Contrary to the above, Preference shares can be issued for a maximum period of 20 years only (Section 80(5A)) and afterwards have to be compulsorily reedemed. Thus, preference shares are not eternal shares.
3. If we try to issue equity shares convertaible into preference shares, say after 20 years, they will be reedemed and a situation may come that, in 21st year, there won't be any capital avaialble with company, which is again hit by provisions of Section 45. (i.e. no capital = no members).
4. In view of above, issue of convertiable PS into ES looks odd. However, in the senario 3, if the company could issue another class of CPS before 20 years (say in the 18th or 19th year), the technical flaw may be overcome, but how the situation would be viewed by the creditors etc., the financial implications and going cocern concept etc., needs to be checked.
Other views are welcome
12 January 2012
My views on your question are as follows:
1. The equity paid up capital is the base and eternal capital, once issued, can not be taken back unless and until one follows the mechanism of "Reduction of Capital" for partial withdrwal and "Winding up" for withdrwal of leftover.
2. Contrary to the above, Preference shares can be issued for a maximum period of 20 years only (Section 80(5A)) and afterwards have to be compulsorily reedemed. Thus, preference shares are not eternal shares.
3. If we try to issue equity shares convertaible into preference shares, say after 20 years, they will be reedemed and a situation may come that, in 21st year, there won't be any capital avaialble with company, which is again hit by provisions of Section 45. (i.e. no capital = no members).
4. In view of above, issue of convertiable PS into ES looks odd. However, in the senario 3, if the company could issue another class of CPS before 20 years (say in the 18th or 19th year), the technical flaw may be overcome, but how the situation would be viewed by the creditors etc., the financial implications and going cocern concept etc., needs to be checked.
Other views are welcome
1. The equity paid up capital is the base and eternal capital, once issued, can not be taken back unless and until one follows the mechanism of "Reduction of Capital" for partial withdrwal and "Winding up" for withdrwal of leftover.
2. Contrary to the above, Preference shares can be issued for a maximum period of 20 years only (Section 80(5A)) and afterwards have to be compulsorily reedemed. Thus, preference shares are not eternal shares.
3. If we try to issue equity shares convertaible into preference shares, say after 20 years, they will be reedemed and a situation may come that, in 21st year, there won't be any capital avaialble with company, which is again hit by provisions of Section 45. (i.e. no capital = no members).
4. In view of above, issue of convertiable PS into ES looks odd. However, in the senario 3, if the company could issue another class of CPS before 20 years (say in the 18th or 19th year), the technical flaw may be overcome, but how the situation would be viewed by the creditors etc., the financial implications and going cocern concept etc., needs to be checked.
Other views are welcome
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Is this income indian or foreign income?
- ITC temporary reversal and reclaim
- GST on export of services and Input Credit
- RCM applicability on Rent Paid by Registered Person to Unregistered Landlord for Residental Building
- Applicable TDS rate for sale of property in Nov 2024
- Inventory of finished goods
- Tds on building rent monthly
- RCM INVOICING FROM NOV-2024
- Can we claim ITC of Feb-2024 in the month of November-2024 which was not claimed by oversight
- REGARDING 25 AS DATE OF PAYMENT AND DATE OF BOOKING
- Sale of property furniture sale
- Confusion around Form 26QB fields
- Adjustment entry in the case of Individual and HUF on 31st March
- Stock difference tax applicable on composite rate or normal rate
- LAST YEAR 2022-23 ITC IN NEXT YEAR 2023-24 REPORITNG IN GSTR-9
- MIS MATCH OF INVOICE NUMBER
- IGST Credit-Show cause notice issued-confusion
- Issue of gst e invoice
- How to adjusted advances given or receipt
- Foreign vendor without PAN unable to to register due to non receipt of OTP on foreign number ?
Trending Online Classes
CAclubindia
