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Right shares

sakshi (CS) (261 Points)

17 February 2011

Whether rights shares under setion 81(1A) includes preference shares??

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3 Replies

SAMAR JEET SINGH (CA) (72 Points)
Replied 17 February 2011

Hi,

1. Word share is bigger term and it includes both equity and preference.Section 85 explains two kind of share capital i.e. Equity and preference.

2. Section 81 (Further issue of share capital ) subsection (1)(a)

"such [further] shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid-up on those shares at that date;"

Word "such [further] shares" here the word "such" indicates it can be any of the two i.e. equity or preference shares.

Warm regards.

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Sudhir Garg (Service) (236 Points)
Replied 17 February 2011

Mr Singh

As per my opinion, section 81(1A) does not apply on preference share capital.

It looks odd to me to offer preference shares (in case of further allotment) first to Equity shareholders. How does it matches as both belong to different class of shareholders. Infact, this depends upon the interpretation as language of section is not very clear on this.

Appreciate if you come with any case law quotation or anything else to support your view.

Views of other members solicited.

Regards-Sudhir

SAMAR JEET SINGH (CA) (72 Points)
Replied 17 February 2011

Hi,

1. SEBI Guidlelines for listed companies:

The preferential issue of equity shares/Fully Convertible Debentures (FCDs)/Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any select group of persons under section 81(1A) of the Companies Act, 1956, on private placement basis shall be governed by these guidelines

If the preference shares are convertible into equity shares than it will attract the above.

2. Unlisted Public Companies (Preferential Allotment) Rules, 2003: For Unlisted companies:

These rules shall be applicable to all unlisted public companies in respect of preferential
issue of equity shares, fully convertible debentures, partly convertible debentures or any
other financial instruments, which would be convertible into or exchanged with equity.

If the preference shares are convertible into equity shares than it will attract the above.

3. section 81 not applies to private company.

Warm regards.