Issue & Conversion of Compulsory Convertible Preference Shares into Equity Shares

Relevant Provisions of Companies Act 2013 – Section 55 Of Companies Act 2013

First let us discuss, can company issue Convertible Preference shares?

As per the section 55 of Companies Act 2013, a company can issue preference shares which shall be liable to be redeemed within a period not exceeding twenty years from the date of their issue except in case of ccompany which is engaged in the setting up and dealing with of infrastructural projects as they may issue preference shares for a period not exceeding thirty years, subject to the redemption of a minimum 10% of such preference shares per year from the 21^st year onwards or earlier, on proportionate basis, at the option of the preference shareholders.

So, the conclusion is, company can issue convertible preference shares but they shall be mandatorily/ compulsorily be convertible into equity shares within 20 years or 30 years in case of infrastructure company. As non-conversion will lead to the default/ non-compliance of section 55 (above stated provision).

Now the process to issue Compulsory convertible preference shares: –

The issue of CCPS primarily governed with the following sections of Companies Act 2013: –

• Section 42 of Companies Act – Offer or Invitation for Subscription of Securities on Private Placement
• Section 55 of Companies Act – Issue and redemption of preference shares
• Section 62 of Companies Act- Further issue of capital

And rules thereunder.

PROCESS: –

• Convene Board Meeting and approve the following :-
• Issue of Compulsory convertible preference shares (including letter of offer)
• Notice of General meeting
• Hold General Meeting and pass Special resolution for the issue of Compulsory Convertible Preference Shares
• File MGT-14 with ROC for above special resolution
• Circulate letter of offer
• On receiving acceptance and amount of Capital, Convene Board meeting for Allotment of Preference shares and issue of share certificates
• File PAS-3 (Return of allotment) within 30 days from the date of allotment.
• Issue Share certificates.

CONVERSION: –

• Convene Board Meeting and approve the conversion of compulsory convertible Equity shares
• Pass SH-7 for the redemption of preference – Here is the point of discussion

Is Filing of SH-7 required for Conversion of Convertible Preference Shares?

Purpose of SH-7 as stated under Rule 15 of the Companies (Share capital and Debentures) Rules 2014 are: –

• Increase in authorize share capital
• Company not having share capital increases its members
• Consolidation or division
• Increase in share capital with Central Government order
• Redemption of Redeemable preference shares
• Cancellation of unissued shares of one class and increase in shares of another class

Now one aspect can be that e-form SH-7 can be used to file the redemption of redeemable preference shares but as Its not possible for the company to issue irredeemable preference share, the E-form should be used to file every way of redemption including redemption by the way of conversion of preference shares into equity.

Another aspect is Redemption doesn’t include Conversion of preference shares as in case of redemption, the company has the obligation to pay the consideration in the form of cash and in the second case the company is oblige to issue equity shares in lieu of redemption of preference shares.

For instance – If company wants to Convert its Compulsory Convertible Preference shares, would the necessary filing be include filing of SH-7 or not??

Conclusion – NO, as filing SH-7 is necessary only in case of redemption of redeemable preference shares and redemption does not include conversion of preference shares into Equity shares.

• Only PAS -3 is required to file for such conversion of preference shares into equity shares