Meaning of 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:
Ways to issue preference shares in the private company:
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:
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.
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.
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.
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:
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
Day 8 Board Meeting
An Explanatory Statement for issue shall contain the relevant facts regarding the issue such as:-
Issue Notice of General Meeting. As per SS-2.
Day 30 EGM
Day 31 Circulate Letter of Offer in form PAS-4 placement offer cum application letter:
Day 31 File Form with Registrar:
Day 31 Open Separate Bank Account:
Call Board Meeting after receiving of allotment of money.
Day 47 Hold the Board Meeting:
Day 48 File form with ROC:
File PAS-3 with Registrar of Company within 15 days of allotment.
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:
Condition for Redemption of Preference Shares:
(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:
Company is not in position to Redeem:
PROCESS FOR REDEMPTION OF PREFERENCE SHARES:
Call Meeting of Board Director:
Hold the Board Meeting:
File Form with Registrar: