We would like to discuss herein about the applicability of Section 62(1) of the Companies Act, 2013 (‘CA, 2013’) to ‘Preference Shares’. First, it is necessary to know the scope of Section 62 of the CA, 2013 which provides for issue of rights shares to existing equity shareholders. It also provides for issuance of shares to employees under Employees Stock Option Scheme and issue of shares on Preferential Basis. Sub-section (4) to (6) relate to conversion of Loans granted/Debentures subscribed by the Central Government into shares of the company.
Now, in respect of the question of applicability of Section 62(1) to Preference Shares, the following view has been taken in Ramaiya that “The opening part of section 62(1) of the CA, 2013 generally refers to increase in the subscribed capital of the company by allotment of further shares, without confining the same to the equity shares, by virtue of the provisions of clause (a) of section 62(1) of the CA, 2013 which speaks to offer to holders of equity shares, it may be inferred that issue of preference shares falls outside the ambit of this section.”
But, by reading the opening para of Section 62(1) which says that “Where at any time, a company having share capital proposes to increase its subscribed capital by issue of further shares, such shares shall be offered……” it is difficult to say that issue of ‘Preference Shares’ falls outside the ambit of this section.
Let’s go for the definition part of subscribed capital which has been provided in clause (86) of Section 2 of CA, 2013 as “Subscribed Capital” means such part of the capital which is for the time being subscribed by the members of a company.
Also, we should put our attention to kind of capital provided under section 43 of the CA, 2013. According to this section, the Share Capital of a company limited by shares be of two kinds namely-
- Equity Shares Capital (with voting rights or with differential voting rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed) and
- Preference Share Capital.
In the light of the above, as capital includes both Equity Share Capital and Preference Share Capital, therefore it seems that in case of issue of further shares (i.e. Preference Shares), Section 62(1) of CA, 2013 shall be equal applicable.
Furthermore, we should consider and give our attention to SCHEDULE III [Financial Statements for a company whose Financial Statement are required to comply with the companies (Accounting Standards) Rules, 2006] which prescribes the format and general instruction for preparation of Balance Sheet and Profit and Loss of a company. As per the said Schedule, the presentation of share capital in the balance sheet is reflected as under-
BALANCE SHEET
Name of Company………………..
Balance Sheet as at…………………
(Rupees in…….)
|
Particulars |
Notes No. | Figures as at the end of current reporting period | Figures as at the end of the previous reporting period |
| 1 | 3 | 3 | 4 |
| I. EQUITY AND LIABILITIES
(1) Shareholders’ funds (a) Share Capital (b) Reserve and surplus (c) Money received against share warrants (2) Share Application money pending allotment ……. ……. |
Further, para 6 for share capital in Notes to General Instruction for preparation of Balance Sheet may be read as under-
“6. A company shall disclose the following in the notes to accounts.
A. Share Capital
For each class of share capital (different classes of preference shares to be treated separately):
(a) The number and amount of shares authorized.
(b) The number of shares issue, subscribed and fully paid, and subscribed but not fully paid;
(c) Par value per share;
(d) A reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period.
(e) The rights, preferences and restrictions attaching to each class of shares including restrictions on the distribution of dividends and the repayment of capital;
(f) Shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by or by subsidiaries or associates of the holding company or the ultimate holding company in aggregate.
(g) Shares in the company held by each shareholder holding more than 5 percent shares specifying the number of shares held;
(h) Shares reserve for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts;
(i) For the period of five years immediately preceding the date as at which the Balance Sheet is prepared:
(A) Aggregate number and class of shares allotted as fully paid up pursuant to contract(s) without payment being received in cash.
(B) Aggregate number and class of shares allotted as fully paid up by way of bonus shares.
(C) Aggregate number and class of shares bought back.
(j) Terms of any securities convertible into equity/preference shares issued along with the earliest date of conversion in descending order starting from the farthest such date;
(k) Calls unpaid (showing aggregate value of calls unpaid by directors and officers);
(l) Forfeited shares (amount originally paid-up)
(m) A company shall disclose shareholding of promoters* as below:
|
Shares held by promoters at the end of the year |
% Change during the year*** | |||
| S. No. | Promoter Name | No. of Shares** | % of total shares** | |
| Total | ||||
*Promoter here means promoter as defined in the Companies Act, 2013.
**Details shall be given separately for each class of shares.
***percentage change shall be computed with respect to the number at the beginning of the year or if issued during the year for the first time then with respect to the date of issue.”
It is also clear from the above that as subscribed capital includes both Equity Share Capital and Preference Share Capital, therefore it seems that in case of issue of further shares (i.e. Preference Shares), Section 62(1) of CA, 2013 shall be equal applicable.
Now, whether it can be said that-
i. Rights issue of Preference Shares to existing equity shareholders (Section 62(1)(a) of CA, 2013) ;
ii. Issuance of Preference shares to employees under Employees Stock Option Scheme (Section 62(1)(b) of CA, 2013) and
iii. Issue of Preference shares on Preferential Basis (Section 62(1)(c) of CA, 2013).
Further, it is also necessary to mention about Section 55 of the CA, 2013 which provides issue and redemption of preference shares. In accordance with the provisions of Section 55, a company limited by shares may, if so, authorized by its articles, issue preference shares which are liable to be redeemed within a period of not exceeding 20 years from the date of their issue subject to such conditions as may be prescribed. Further, no company can issue irredeemable preference shares. Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 are the relevant rule under section 55 which lay down conditions for issue and redemption of preference shares. It is relevant to mention herein that the said Section 55 of the CA, 2013 does not differentiate Preference Shares into Convertible or non-convertible. It means Section 55 is equally applicable on both whether Convertible Preference Share or Non-convertible Preference Shares.
Therefore, pursuant to Section 55, if a company limited by shares issue Preference Shares, it has to comply the terms and conditions as may be prescribed therein. But, it is also relevant to mention herein that in accordance with the provisions of clause (c) of sub-section (1) of Section 62, where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares may be offered to any persons on preferential basis, if it is authorized by a special resolution, either in cash or for consideration other than cash, if the price of such shares is determined by valuation report of a registered valuer subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 prescribed the other conditions for issue of shares on preferential basis. Further, pursuant to Rule 13(1) of the Companies (Share Capital and Debentures) Rules, 2014 issue of shares on preferential basis should also comply with conditions laid down in Section 42 of CA, 2013.
So, as we have already discussed above that in case of issue of further shares (i.e. Preference Shares), Section 62(1) of CA, 2013 shall be equal applicable. Therefore, in case of issue of Preference Shares on preferential basis, Section 62(1)(c) of CA, 2013 is also equally applicable and the company has to comply the terms and conditions as may be prescribed therein and also comply with conditions laid down in Section 42 of CA, 2013.
Further, with the reference to explanation provided under Rule 13(1) of the Companies (Share Capital and Debentures) Rules, 2014 “Preferential offer” means an issue of shares or other securities, by a company to any select person or group of persons on preferential basis and does not include shares or other securities offered through a public issue, right issue, ESOS, ESPS or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities. Further, the expression, ‘shares or other securities’ means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.
But it is pertinent to mention herein that the definition of ‘shares or other securities’ does not include non-convertible Preference Shares and includes only convertible Preference Shares into equity shares, therefore in case of issue of ‘Non-convertible Preference Shares’ or ‘Convertible Preference Shares into other class of Preference Shares’, Section 62(1)(c) of CA, 2013 shall not attract.
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