All About Issue of Preference Share on Preferential basis

Meaning of Preference Shares:

• As per Explanation (ii) to section 42 of the Companies Act, 2013 (‘the Act’), the term preference shares mean and includes that part of the share capital the holders of which have a preferential right over payment of dividend (fixed amount or rate) and repayment of share capital in the event of winding up of the company.
• Further, as per Explanation (iii) to section 42, when a certain class of shares has either of the following features, the same shall be deemed to be preference shares.

1. In addition to the preferential right to receive dividend, the shareholders have a right to participate either fully or to a limited extent in the capital not having preferential treatment

2. In addition to the preferential repayment of share capital in the event of winding up, the shareholders are entitled to participate either fully or to a limited extent in the surplus capital of the company available

3. Rights Issue of Equity Shares no approval of Members required.

4. In view of Section 55 of the Companies Act, 2013 read with the Rule 9 of the Companies (Share Capital and Debenture) Rules, 2014 Members approval by way of Special Resolution required. We need to give effect of both the Sections.

5. Preference shares allow an investor to own a stake in the issuing company with a condition that whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid.

6. In addition to their preferential rights, the following rights are also attached to the preference share capital.

7. In respect of dividend –  It has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right.

8. In respect of capital – It has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

 Kinds of Preference shares:

There are eight types of preference shares. In case of dissolution of the company, any of the eight types would be paid out before other types of equity. Let’s understand each of them:

Cumulative: As the word indicates, all dividends are carried forward until specified, and paid out only at the end of the specified period.

Non-cumulative: The opposite of cumulative, obviously. Dividends are paid out of profits for every year. There are no arrears carried over a time period to be paid at the end of the term.

Redeemable: Such preference shares can be claimed after a fixed period or after giving due notice.

Non-Redeemable: Such shares cannot be redeemed during the lifetime of the company, but can only be obtained at the time of winding up (liquidation) of assets.

Convertible: The shares can be converted into equity shares after a time period, or as per the conditions laid down in the terms.

Non-convertible: Non-convertible preference shares cannot be, at any time, converted into equity shares.

Participating: Such shares have the right to participate in any additional profits, after paying the equity shareholders. The surplus of profit is apart from the fixed dividend paid up for preference shares.

Non-Participating: Non-participating preference shares do not possess any right to participate in surplus profits or any surplus gained at the time of liquidation of the company.

Tenure of Preference Shares continued as 20 years except for “Infrastructural Projects”Companies having “infrastructural projects” can issue  Preference Shares for > 20 years but upto 30 years subject to minimum 10% redemption of such preference shares from 21styear onward or earlier.

Explanation.—for the purposes of sub-section (2), the term ‘‘infrastructure projects’’ Means the infrastructure projects specified in Schedule VI.

Issue of the preference shares is restricted to a certain extent.

Issue of preference shares may be made either through:

• Rights Issue under Section 62(1)(a)only to the existing Equity Shareholders; or
• ESOP Under Section 62(1)(b)specifically provides for the issue to the employees or
• Preferential Allotment under Section 62(1)(c)of the Companies Act, 2013 to any person including above can participate in this type of further issue subject to the adherence to Rule  13 of Companies (Share Capital and Debenture) Rule, 2014;
• Private Placement of Shares under section Section-42 read with the rule;

Ways to issue preference shares in the private company:

• Rights or Bonus Issue
• Private placement

CONDITIONS FOR PREFERENTIAL ALLOTMENT OF SHARES

Offer to be previously approved by Special Resolution:

The proposed offer of shares or invitation to subscribe shares has been previously approved by the shareholders of the company, by a Special Resolution, for each of the Offer of Invitation.

Authorization in Article of Association:

There should be authority in AOA of the Company to issue shares/ securities through PAS. If such power is absent then amend the clauses of AOA to insert power to PAS.

Maximum No. of persons to whom offer can be made:  

• An offer can be made under a Private Placement Offer Letter to not more than 200 people in a financial year.
• Not just the limitation of allotment to 200 people but even an invitation to subscribe can’t be made to more than 200 people.
• The 200 people limit excludes Qualified Institutional Buyers and Employees and the limit of 200 people is calculated individually for each kind of security.

The restriction of 200 member would be reckoned individually for each kind of shares / security i.e. (equity share, preference share or debenture).

Finalization of name of Allottees:

As per rule 13(2)(d) Company have to mention the  the names of the proposed Allottees and the percentage of post preferential offer capital that may be held by them in the explanatory statement to be issued for the General Meeting.

Offer Letter (PAS -4):

The Company shall prepare the offer letter in form PAS-4 and maintain the complete record of PAS in form PAS-5. In case of any preferential offer made by a company to one or more existing members only then no need to prepare offer letter in PAS-4 format and no need to prepare PAS-5.

Time period for completion of the Allotment:

The allotment of securities on a preferential basis shall be completed within a period of twelve months from the date of passing of the special resolution. If the allotment of securities is not completed within twelve months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete such allotment thereafter.

OR

The company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money. Whichever is earlier.

Valuation report:

The price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer.

Application Form:

The offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons at extra ordinary general meeting.

No further offer till completion of earlier offer:The requirements or provision of sub-section (3) of Section-42 shall apply in respect of offer or invitation of each kind of Shares / security and no offer or invitation of another kind of security shall be made unless allotments with respect to offer or invitation made earlier in respect of any other kind of security in completed.

Value of Offer and invitation:The value of the Offer per person shall not be less than INR 20,000 of ‘face value’ of securities. The shareholder can accept less value of shares.

Separate Bank Account:

Except in case of issue of shares for cash or consideration other than cash the following provisions required to follow:

• The payment for subscription should be through the bank account of the person subscribing to the Shares / security
• The Company should keep a record of the bank account from where such payments have been received.
• The money so received shall be kept in a separate bank account of the company and utilized only for allotment (or repayment).

Other Conditions:

• The offer letter shall be sent to persons, either in writing or in electronic mode
• The Company shall not release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.
• There is no condition in the Act or rule regarding minimum gap between two offers. A company can come with new offer after completion of earlier offer.
• There is no condition in the Act or rule regarding maximum Number of Preferential allotment of shares in a financial year

Procedure for issue of preference share

First Identify the person to whom the allotment has to be made then

Day 1  Notice for Board Meeting to all the directors

• Attach Agenda, Notes to Agenda & draft resolution of Board Meeting along with Notice.

Day 8 Board Meeting

• Resolution 1: Pass Board Resolution alteration of share capital for reclassification of authorized share capital (IF REQUIRED)
• Resolution 2: Approval of offer letter for  Issue of Preference shares containing the name of persons to whom the share is issued

An Explanatory Statement for issue shall contain the relevant facts regarding the issue such as:-

• Size of the Issue, No. of Preference, Nominal Value of the Shares
• Nature of the shares i.e. Cumulative/Non-cumulative, Participating/Non-participating, Convertible/Non-convertible etc.
• Objective & Manner of the issue.
• Price at which shares are proposed to be issued & basis on which price has been arrived i.e. method of valuation etc.
• Terms of issue, rate of dividend, terms & tenure of redemption.
• Current shareholding pattern of the Company
• Expected dilution of Equity Shares upon conversion (only if the nature of the issue is convertible preference shares).

Issue Notice of General Meeting. As per SS-2.

Day 30 EGM

• Pass Special Resolution for Alteration of Shares Capital (IF REQUIRED)
• Present Offer Letter in PAS-4 before the members of the meeting.
• Pass Special Resolution for Preferential allotment of Shares.
• the Resolution shall contain the following information:-
  • Priority with respect to payment of dividend/repayment of the capital.
  • Participation in surplus funds, assets or profits on winding-up.
  • Payment of dividend on cumulative/non-cumulative basis.
  • Conversion of preference into equity.
  • Voting rights (limited to the matters related to preference shareholders only).
  • Terms of redemption.

Day 31 Circulate Letter of Offer in form PAS-4 placement offer cum application letter:

• Offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.
• Offer Letter sent either in writing or electronic mode.
• Issue offer letter within 30 days of General Meeting/recording the name of such person.

Day 31 File Form with Registrar:

• File SH-7 with Registrar within 30 days of passing of Special Resolution for Reclassification
• File MGT-14 with Registrar within 30 days of passing of Special Resolution.

Attachments:

• Notice of General Meeting along with Explanatory Statement.
• Certified True copy of Special Resolution.
• Minutes of General Meeting
• Altered MOA

Day 31 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.

Day 40

Call Board Meeting after receiving of allotment of money.

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

Day 47 Hold the Board Meeting:

• Present List of Allottees before the Meeting.
• Pass Board Resolution for allotment of shares (within 60 days of receiving of money).
• Pass Resolution for issue of Share Certificate in same Meeting.
• Authorize to two directors and a authorize person to sign share certificate.

Day 48 File form with ROC:

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

Attachments:

• List of Allottees.
• Board Resolution for allotment of Shares.

Day 50 Issue Share Certificate:

Issue Share Certificate in Form- SH-1 (As per Section-56 with in 2 (two) months from the date of allotment of shares.

Maintain Register of Members as prescribed under section 88 of the Companies Act, 2013.

Shares issued to promoters as preferential allotment are subject to a lock in period of three years, and so they cannot transfer such shares. Nevertheless, the securities issued to other investors are subject to lock-in period of one year only

Redemption of Preference Shares:

• Preference shares can be redeemed only out of the profits available for distribution to its shareholders as Dividend
• Preference shares can be redeemed only out of Preference shares can be redeemed only fresh proceeds of shares issued solely for the purpose of funding the redemption of the preference shares

Condition for Redemption of Preference Shares:

• Fully paid-up preference shares can only be redeemed.
• 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 under section 48 of the Act and the preference shares may be redeemed:-

(a) at a fixed time or on the happening of a particular event;

(b) any time at the company’s option; or

(c) any time at the shareholder’s option.

Capital Redemption Reserve:

• Capital Redemption Reserve:Where the redemption of preference shares are redeemed out of the profits available for distribution, a sum equivalent to the nominal amount of shares being redeemed shall be transferred to the Capital Redemption Reserve.
• Utilization of CRR:The CRR shall be treated as the paid up share capital of the company for all purposes and can also be utilized for bonus issue of shares

Company is not in position to Redeem:

• Where the company is unable to redeem its preference shares or is unable to pay the dividend due on the preference shares, the company can replace issue such amount of preference shares as may be necessary in order to meets its obligation towards dividend payment and also redemption of preference shares.
• Redemption of preference shares by issuing new preference shares is subject to obtaining the consent of the preference shareholders (at least 75% of the shareholders) and also obtaining the approval of the Tribunal for such arrangement
• The Tribunal shall order the company to immediately redeem the preference shares held by the shareholders dissenting to such arrangement. The issue of preference shares for purpose of redemption of unredeemed preference shares (along with the dividend) shall not be considered as an increase in the share capital of the company

PROCESS FOR REDEMPTION OF PREFERENCE SHARES:

Call Meeting of Board Director:

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

Hold the Board Meeting:

• Check the quorum of Board Meeting.
• Pass Board Resolution for approval of Redemption of Preference Shares.
• Present Letter for redemption of Preference Shares before the members of the meeting.

File Form with Registrar:

• File SH-7 with Registrar within 30 days of passing of Resolution.
• Certified True copy of Resolution.