Preference as the term implies are the shares that rank at a priority above the equity shares. It means 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.
Features of Preference shares
Preferential right to receive dividend and in repayment in case of winding up
No voting rights*
Preference shareholders do not enjoy voting rights like equity shareholders. But under certain circumstances voting rights will also be available to the preference shareholders of the company. Where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
A company having a share capital may issue preference shares subject to the following conditions, namely:-
A company issuing preference shares shall set out in the resolution, particulars in respect of the following matters relating to such shares, namely:-
The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall, inter-alia, provide the complete material facts concerned with and relevant to the issue of such shares, including-
Under this mode, Company has to offer its preference shares to the existing equity shareholders first. Under this mode, the process of issue would be as follows:
> Convene Extra Ordinary General Meeting to take approval of shareholders by special resolution
> File e-form MGT-14
> Receive acceptance and renunciations of rights from members to whom offer has been made
> Finalization of Allotment
> Allotment of Preference Shares by Board or Committee or Concerned Employee/office
> File e-form PAS-3
> Issue of share certificate
Registered Valuer’s Report is not required in case of right issue of shares but it is required in case of preferential issue.
Where convertible preference shares are offered on a preferential basis with an option to apply for and get equity shares allotted, the price of the resultant shares pursuant to conversion shall be determined-
(i) either upfront at the time when the offer of convertible securities is made, on the basis of valuation report of the registered valuer given at the stage of such offer, or
(ii) at the time, which shall not be earlier than thirty days to the date when the holder of convertible security becomes entitled to apply for shares, on the basis of valuation report of the registered valuer given not earlier than sixty days of the date when the holder of convertible security becomes entitled to apply for shares:
Provided that the company shall take a decision on price of resultant shares at the time of offer of convertible security itself and make such disclosure in explanatory statement.
Section 55(2) provides that a company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue. However, a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum 10 % of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
Section 55(1) make it clear that No company limited by shares shall issue any preference shares which are irredeemable. So, every preference share must be redeemed as per its terms and conditions.
The terms and conditions of issue of preference shares can be changed, altered, modified or amended subject to the following conditions:
A company may redeem its fully paid preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders:-
(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.
No preference shares shall be redeemed except