Issue And Redemption Of Preference Shares - Section 55 Of The Companies Act, 2013

What are Preference shares?

Preference shares are those shares which has priority over the equity shares in payment of dividend. These shares not only have a preferential right to receive dividends but also repayment of capital on winding up.

Types of preference shares

• Cumulative Preference Shares where shareholders receives dividend even in years of inadequate profits.
• Non-Cumulative Preference Shares where shareholders do not receive dividends as in years company suffers in losses or insufficient profits.
• Redeemable Preference Shares which are redeemed by the company at a later stage, usually within 20 days of issue is also known as callable preference shares.
• Irredeemable Preference Shares where a company can only be redeemed upon liquidation or closing of operations. There shares cannot be issued by Indian companies.
• Convertible Preference Share where shares are converted into common equity shares at a specific price and time and offer fixed dividends and potential for higher returns with rising share prices to shareholder.
• Non-Convertible Preference Shares which cannot be converted into ordinary equity shares of company. They retain preferential rights in capital payment over common shareholders during company liquidation.
• Participating Preference Shares where shareholder get a chance to earn higher dividends beyond fixed rates. Share will be in surplus profits if company exceeds specified earnings benchmark.
• Non-Participating Preference Shares which are entitled only to pre-fixed dividend payments and cannot share in company's surplus profits.
• Adjustable-Rate Preference Shares where dividend rates may vary based on prevailing market interest rates.
• Preference Shares with a Callable Option where a company can repurchase shares at a specified price and date.

Provisions under Companies Act, 2013

Section55(1)- No Company limited by shares shall issue any preference shares which are irredeemable.

Section 55(2) - A Company limited by shares if authorised by its articles can issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue subject to the following conditions:

• The issue of such shares has been authorized by passing a special resolution in the general meeting.
• The company, at the time of such issue of preference shares, has no subsisting default in the redemption of preference shares issued either before or after the commencement of this Act or in payment of dividend due on any preference shares.

Further the Company can issue preference shares for a period exceeding 20 years but not exceeding 30 years for infrastructure projects subject to the redemption of a minimum 10% of such preference shares per year from 21^st year onwards or earlier, on proportionate basis, at the option of the preference shareholders.

(A) Issue Of Preference Shares

Modes through which preference shares can be issued

• Right Issue - Section 62(1)(a)
• Preferential Allotment - Section 62(3) (c) read with Section 42
• Private Placement - Section 42

(1) Procedure For Issue Of Preference Shares Through Right Issue

STEP-1: Call Meeting of Board of Directors

• Issue Notice of Board Meeting to all directors of the company at least 7 days before the date of Board Meeting.

STEP-2: Hold Board Meeting

• To Consider the issue of preference shares on right basis and identify the shareholders to whom offer is to be made.
• To pass a board resolution approving offer letter to be send to existing shareholders.
• To approve the Notice for calling Extra-Ordinary General Meeting.

STEP-3: Call Extra Ordinary General Meeting

• Issue Notice of Extra Ordinary General Meeting at least 21 days before the date of Meeting.

STEP-4: Hold Extra Ordinary General Meeting

• To consider and approve the offer letter.
• To pass a Special Resolution approving allotment of preference shares.

STEP-5- Offer to Existing Shareholders

• The offer shall be made to all Existing Shareholders through notice specifying the number of shares offered and other details at least 3 days before opening of the issue.
• The offer shall remain open for a period not less than 15 days and not exceeding 30 days from the date of opening of the offer.

STEP-6: Filing of Form MGT-14 with Registrar

• File Form MGT-14 with Registrar within 30 days of passing of Special Resolution.

STEP-7: Finalizing Allotment

• Receiving the allotment money from respective shareholders.
• Finalising the list of allottees.

STEP-8: Call Meeting of Board of Directors

• Issue Notice of Board Meeting to all directors of the company at least 7 days before the date of Board Meeting.

STEP-9: Hold Board Meeting

• To approve the final list of allottees.
• To pass Board Resolution for Allotment of Shares.

STEP-10: Filing of Form PAS-3 with Registrar

• File Form PAS-3 with Registrar within 30 days of allotment.

STEP-11: Intimate Allotment details to Depository

• Inform allotment details to depository.
• Make entries in registrar of shareholders

(2) Procedure For Issue Of Preference Shares Through Private Placement

STEP-1: Call Meeting of Board of Directors

• Issue Notice of Board Meeting to all directors of the company at least 7 days before the date of Board Meeting.

STEP-2: Hold Board Meeting

• To Identify the persons to whom private placement offer letters are to be issued.
• To pass a Board Resolution for approving Offer-Cum-Application in PAS-4
• To Adopt Valuation Report for Shares.
• To pass a Board Resolution for opening a separate bank account in schedule bank.
• To approve the Notice for calling Extra-Ordinary General Meeting.

STEP-3: Filing of Form MGT-14 with Registrar

• File Form MGT-14 with Registrar within 30 days of passing of Board Resolution.

STEP-4: Call Extra Ordinary General Meeting

• Issue Notice of Extra-Ordinary General Meeting at least 21 days before the date of Meeting.

STEP-5: Hold Extra Ordinary General Meeting

• To Place Offer-Cum-Application before members for approval.
• To Pass a Special Resolution for allotment of shares.

STEP-6: Filing of Form MGT-14 with Registrar

• File Form MGT-14 with Registrar within 30 days of passing of Special Resolution.

STEP-7: Circulate Offer-Cum-Application in PAS-4

• The offer-cum-application shall be sent to all such persons to whom the offer is to be made.
• The offer shall be sent within 30 days of recording the names of such persons.

STEP-8: Open Separate Bank Account

• The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities.
• The company shall keep the record of the bank account from where such payment for subscription has been received.

STEP-9: Call Meeting of Board of Directors

• Issue Notice of Board Meeting to all directors of the company at least 7 days before the date of Board Meeting.

STEP-10: Hold Board Meeting

• To Place a List of Allottees before the Board.
• To Pass a Board Resolution for Allotment of Shares.

STEP-11: Filing of Form PAS-3 with Registrar

• File Form PAS-3 with Registrar within 15 days of allotment.

STEP-12: Intimate Allotment details to Depository

• Inform allotment details to depository.
• Make entries in registrar of shareholders.

(B) Redemption Of Preference Shares

According to the Rule 9(6) of Companies (Share Capital and Debentures) Rules, 2014, a Company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders.

The preference shares may be redeemed

• At a fixed time or on the happening of a particular event;
• Any time at the company’s option or
• Any time at the shareholder’s option

Preference shares can be redeemed out of

• Profits available for dividend
• Fresh proceed from issue of shares

Conditions for Redemption- proviso to section 55(2)

• Preference Shares shall be redeemed out of the profits of the company which are available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption.
• Such shares shall be redeemed only if they are fully paid.
• where such shares are proposed to be redeemed out of the profits of the company, then a sum equal to the nominal amount of the shares to be redeemed, shall be transferred to Capital Redemption Reserve Account.
• In case of such companies who comply with the accounting standards pursuant to the provisions of section 133, the premium payable on redemption shall be provided out of profits of the company before the shares are redeemed.

Procedure For Redemption Of Preference Shares

STEP-1: Call Meeting of Board of Directors

• Issue Notice of Board Meeting to all directors of the company at least 7 days before the date of Board Meeting.

STEP-2: Hold Board Meeting

• To Pass Board Resolution for approving redemption of preference shares.

STEP-3: Inform Preference Shareholders

• All preference Shareholders shall be informed individually about the proposed redemption.

STEP-4: Transfer to Capital Redemption Reserve

• Transfer the nominal amount of shares to be redeemed to a reserve fund called Capital Redemption Reserve from the distributable profits of the company, if the shares are to be redeemed out of distributable profits of the company.

STEP-5: Making Payment to Preference Shareholders

• Making payment of redemption amount and premium (if any) to respective preference shareholders.

STEP-6: Filing Notice of Redemption with Registrar

• The notice of redemption should be filed with register in Form SH-7 within 30 days of redemption of preference shares.

STEP-7: Update Registrar of Members

• Make necessary entries in the members registrar.

Redemption of preference shares when the company is not in a position to redeem

Section55(3): When the Company is not in the position to redeem any preference shares or pay dividend (if any) then it may with the consent of the holders of ¾ in value of such preference shares and with the approval of tribunal by petition, issue further redeemable preference shares equal to the amount due including the dividend in respect of those unredeemed preference shares.

On the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

Issue of further redeemable preference shares

• The petition under section 55(3) of the Act shall be filed with NCLT in Form NCLT-1 along with the documents specified in Annexure-B to the Rules along with the fees as prescribed.
• The tribunal after hearing the petitioner and other persons (if interested) if satisfied in all regards, approve for issue of further redeemable preference shares.
• The tribunal while giving approval, order the redemption of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

Note that issue of such further redeemable preference shares or redemption of preference shares under this section shall not deemed to be any increase or decrease in the share capital of the Company.

The author can also be reached at csneharedekar@gmail.com

Disclaimer: Please note that the above article is based on the interpretation of related laws, which may differ from person to person and is not legal advice.