Issue of Preference Shares under the Companies Act 2013

Preference shares as the term implies are the shares that having priority over the equity shares. These shares contain a preferential right to receive the dividend as are declared by the company on first priority basis.

They are not only having a Preference in receive a dividend on the priority basis but they also have a Preference in receive the proceeds that are realized from the sale of the company’s assets during the course of liquidation prior to pay to equity shares.

In other words, preference shares are the shares that carries 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.

Pre-requisites for the Issue of Preference Shares

Prior to issuing preference shares, there are a few checkpoints that need to be observed and thereafter the issue process for preference shares can be initiated.

On this note the prerequisites to be observed are as follows

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. 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.
4. 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.

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 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.

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 shareholders.

The procedure for the issue of Preference share is given under Section-62 of the Companies Act 2013. It is significant to highlight that issue of share can be in three modes:

1. Right issue of shares [Section- 62(1) (a)]
2. Preferential allotment of shares. [Section- 62(3) (c) and Section-42]
3. Private Placement of shares. [Section-42)

Step to Issue of Preference Shares

Step 1- Call the Board Meeting for Issue of Preference Share by giving 7 days’ notice to Director

Step 2- Conduct the Board Meeting and

• Approve preference share issue including “letter of offer”, which shall include the right of renunciation also in case of Right Issue.
• Issue notice of the general meeting.
• Company Secretary or any director of the company shall be authorized to issue a notice of a general meeting.

Step 3- Hold the general meeting and Pass Special Resolution for issue preference of shares.

Step 4- Filed the MGT-14 with ROC before issue of Letter of Offer to any person (Whether member or not)

Step 5- Circulate Letter of Offer:-

On Receive acceptance/renunciations/rejection of rights from members to whom the offer has been sent & also from persons in whose favour right was renounced.

Step 6- File the GNL-2 for letter of offer, prospector, private placement.

Step 7- Call the Board meeting for Allotment of Preference Shares.

Step 8- Conduct the Board Meeting and

• Approve allotment bypassing of board resolution. And present a list of allottees before the board.
• Pass resolution for Issue of share certificates.
• Authorized any two directors and one more person for signing the share certificates.
• Authorize a director to file E-form PAS 3(Return of Allotment) to ROC within 30 days from date of Allotment.

Step 9- Filing of PAS 3 with ROC within a period of 30 days.

Step 10- Issue of Share Certificate to person whom share was allotted.

Point to be mentioned in a special resolution passed for the issue of preference shares.

As mentioned above for issuing preference shares a special resolution is required to be passed and so the points to be mentioned in the special resolution passed for the purpose of issue of preference shares are as follows:-

• The rights of the preference shareholders with respect to payment of dividend or repayment of capital in comparison to equity shareholders;
• The share of preference shareholders in the surplus fund during the course of winding up;
• The right to participation in surplus assets and profit, on winding-up (if any);
• The payment of dividends whether on the cumulative or non-cumulative basis as is the case;
• The conversion of preference shares into equity shares;
• The voting rights;
• The redemption of preference shares;

Content to be mentioned in the explanatory statement

The notice of the extraordinary general meeting shall be accompanied by an explanatory statement. The points that should be covered in the explanatory statement in this regard are as follows:

• Issue size along with number of preference shares to be issued along with the nominal value of each share;
• Type of such preference shares issued or to be issued;
• Objectives of the issue;
• Manner of issue of shares;
• Issue price of shares as fixed;
• Calculation through which the price has been decided;
• The conditions related to the issue i.e., term of the issue and rate of dividend on each share, etc.;
• Redemption timeline highlighting the tenure of redemption, the redemption of shares at a premium and if the
• preference shares are convertible, the terms of conversion;
• Manner and modes of redemption;
• Current shareholding pattern of the company;
• The Expected dilution in equity share capital consequent to the conversion of preference shares.

Points to be noted while allotment of preference shares

At the time of allotment of preference shares, the company should note the following points:

• Allotment of shares to be made within 60 days of receiving of application money; else it will treat as deposits as per deposits rules.
• Issue share certificate under form-SH-1
• Make entry of allotment of preference share in the register of members as maintained accordance with Section-88 and the Companies (Management and Administration) Rules, 2014.