CS Divesh Goyal


SECTION- 55 & RULE-9 of the Companies (Share Capital and Debentures) Rules


Definition: Preference shares allow an investor to own a stake at 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.

Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company’s assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock:

I.             Cumulative Preferred stock,

II.             Non-Cumulative Preferred stock,

III.             Participating Preferred stock,

IV.            Convertible Preferred Stock. also called preferred stock.

Preference shares are considered as quasi-debt instruments since they combine the features of equity as well as debt. On one side, they carry a preferential right over the ordinary shares to receive dividend at a fixed rate and on the other, they carry an equity risk of not being secured, except to the preferential right of repayment in case of winding-up of the company. Preference shares have proved beneficial for investors, since such quasi-debt instrument provides protection to their investment by possessing voting rights on matters affecting their interest, more so with the fixed rate of dividend. For the promoters, issue of preference shares to investors ensures access to capital without a need to provide any security, with a continued control.

Advantages of preference shares: The main advantage of preference shares over equity shares is that

  • They enjoy a preferential right to dividend and
  • Repayment of capital in case of winding-up of the company.

Disadvantages of preference shares:

The main drawback of preference shares is that they carry limited voting rights:

Generally, an equity share confers on its holder a right to vote on all resolutions that require shareholder approval under the Act, any other law, or the articles of association of the company. Equity shareholders, among others, enjoy the right to appoint and remove directors and auditors, and approve the company’s accounts.

Therefore, the control of a company is in the hands of its equity shareholders.

As distinguished from an equity share, a preference share carries voting rights only with respect to matters which directly affect the rights of the preference shareholders. Due to these limitations on voting rights, a preference shareholder does not have much control over the company. However, a preference shareholder may acquire voting rights on par with an equity shareholder if the dividend on preference shares is in arrears:

Procedure for Issue of Preference share is given under Section-62 of Companies Act, 2013. Issue of share can be in three modes:

  1. Right Issue of Shares [Section- 62(1) (a)]
  2. Preferential Allotment of Shares. [Section- 62(3) (c) and Section-42]
  3. Private Placement of Shares. [Section-42)

In my earlier articles I already discussed in detail the procedure for issue of shares by Right Issue and Private Placement. Same Procedure will be applicable on issue of Preference Shares.

Checks for issue of Preference Shares:

A.      Check whether nominal capital of company divides into Equity Share Capital and Preference Share Capital.

B.      Check whether there is Provision in Article of Association of company regarding issue of Preference shares.

C.      At the time of issue of Preference shares no subsisting default in the redemption of preference shares issued. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014.

D.     At the time of issue of Preference shares no subsisting default in payment of dividend due on any preference share. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014

Conditions for issue of Preference Shares:

A.      The Issue of Preference Shares has been authorized by Passing of Special Resolution in the General Meeting of company.

B.      Fulfill all the requirement mention in the checks above.

C.      Company requires maintaining a register under Section- 88 (Register of Member) shall contain the particulars in respect of such preference share holder(s).

D.     Things to be mentioned in the Special Resolution passed for the purpose of Issue of Preference Shares.

a)      The priority with respect to payment of dividend or repayment of capital vis-à-vis equity shares.

b)      The participation in the surplus fund.

c)      The participation in surplus assets and profit, on winding-up.

d)      The payment of dividend on cumulative or non-cumulative basis.

e)      The conversion of preference shares into equity shares.

f)       The voting rights;

g)      The redemption of preference shares.

Important Condition on Preference Shares:

A. As per section 55 of the Act, a company can issue only redeemable preference shares i.e. a company is not allowed to issue irredeemable preference shares.

B. It is mandatory for every company issuing preference shares to redeem it within a period of 20 years from the date of issue.

C. A company may issue preference shares for a period exceeding 20 (Twenty) years for infrastructure projects. Subject to Redemption of a Minimum 10% of such preference shares per year from the 21 (twenty first) year onward or earlier, on proportionate basis, at the option of preference share holder. (As per rule- 10 of The Companies (Share Capital and Debentures) Rules, 2014.

Issuance of preference shares, Explanatory Statement should mention following information: (Rule 9 of Companies (Share Capital and Debentures) Rules, 2014)

a)      Size of the issue and number of preference shares to be issued and nominal value of each share;

b)      Nature of such shares i.e. cumulative or non – cumulative, participating or non – participating, convertible or non – convertible.

c)       Objectives of the issue;

d)      Manner of issue of shares;

e)       Price at which such shares are proposed to be issued;

f)        Basis on which the price has been arrived at;

g)      Terms of issue, including terms and rate of dividend on each share, etc.;

h)      Terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion;

i)        Manner and modes of redemption;

j)        Current shareholding pattern of the company;

k)      Expected dilution in equity share capital upon conversion of preference shares.


S. NO. STEPS Sections / Rules/ E-forms/ Time Period
A. Call the Board Meeting[As per Section-173(3)](For Shorter Notice of Meeting Proviso of Sub Section-3 of Section-173.) ü  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 Board Meeting.·    [As per Section-174(1)]·    [General Meeting as per Section- 101(1) issue notice of General Meeting at least 21 days before General meeting].


ü  Check the quorum of Board Meeting.ü  Approve right issue including “letter of offer”, which shall include right of renunciation also. (At Board Meeting).ü  Issue Notice of General Meeting.ü  Authorize a director of company to issue notice of General Meeting
Hold Extra Ordinary general Meeting ü  Check the quorum of Meeting.(Section-103).ü  Present Offer Letter before the members of the meeting.ü  Pass Special Resolution for issue preference of shares.
File e-Form- MGT-14 with Registrar ü  With resolution for issue of shares u/s 179(3).
Circulate Letter of Offer ü  (Through registered post or speed post or through electronic mode to all the existing share -holders at least three days before the opening of the issue.)ü  Offer shall be open for period Not less than 15 (fifteen) days or not more then 30 (Thirty) days.
File e-Form- MGT-14 with Registrar ü  File MGT-14 with Registrar within 30 days of passing of Special Resolution.Attachments:ü  Notice of General Meeting along with Explanatory Statement.ü  Certified True copy of Special Resolution.

ü  Minutes of General Meeting

  ü  Receive acceptance/renunciations/rejection of rights from members to whom offer has been sent & also from persons in whose favour right renounced
Call the Board Meeting[As per Section-173(3)](For Shorter Notice of Meeting Proviso of Sub Section-3 of Section-173.) ü  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 Board Meetingü  In List of allottees: Mentioning Name, Address, occupation if any and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the form pas-3. ü  Check the quorum of Meeting.(Section-103).ü  Approve allotment by passing of Board Resolution. And present list of allottees before the Boardü  Pass resolution for Issue of share certificates.ü  Authorize to two directors and one more person for signature on Share Certificates.

ü  Authorize a director to file E-form PAS 3(Return of Allotment) to ROC within 30 days of passing of Resolution

File e-Form- PAS-3 with Registrar{As per Section 39(4) and rule 12 of Companies (Prospectus and allotment of Securitas) Rules, 2014. ü  File PAS-3 with in 30 days of passing of resolution for allotment of shares.ATTACHMENT:ü  Resolution for allotment of Shares.ü  List of allottees.
Issue Share CertificateAs per Section- 56(4) (b) ü  Issue Share Certificate in form SH-1 with in 2 month from the date of allotment of shares.


Ø  Make Allotment within 60 days of receiving of Application Money; otherwise it will treat as deposits as per deposits rules.

Ø  Issue Share Certificate under form-SH-1

Ø  Make Entry of allotment of Preference Share under Register of Member maintained in Form No. MGT-1. {As per Section-88 and the Companies (Management and administration) Rules, 2014.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

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  1. umang rastogi says:

    hi i run a company engaged in construction business looking to tap some funds from venture capital investors but wants to clear a doubt that whether the capital raised in the form of convertible preferred shares will dilute my stake in the company or not so please clear my doubts

  2. Nilesh Choksi says:

    In regards to preference shares, we have some points to be clarified.
    1. Dividend is exempted to shareholder, like for equity shareholder?
    2. Maximum dividend, any limit?
    3. Dividend tax is applied to the company who issued preference shares?
    4. Minimum period?
    5. If company has posted loss, dividend can be given from reserve and surplus a/c?

    Kindly respond us at the earliest.


  3. Ketan Ranade says:

    As per our research, why we need to comply section 42 or section 62 for issue of preference shares as separate section 55 is there for issue of preference shares. Further if you read section 42 & 62 the word securities is mentioned. going by the definition of securities as per SCRA, it has to be marketable security which can not be possible in case of private company, which also held in various case laws. Please confirm without going to section 62 & 42 we can issue pref. shares only under section 55. What are your views?

  4. Nemish shah says:

    Under preferential allotment preference shares can not be issued according to the definition given under the preferential allotment rule only equity shares or any securities which can be converted in to the equity can be issue . hence for issuing preference shares preferential allotment is not applicable

  5. Nemish says:

    Preferential allotment is not applicable for issue of preference share refer definition of securities given under rule for preferential allotment. it says only for equity shares and any other securities which can be converted in to equity . that means preferential allotment is not applicable for preference shares.

  6. Abhishek Roy says:

    Preferential Allotment of Shares. [Section- 62(3) (c) and Section-42] – what does it means. there is no section 62 (3) (c) in Companies Act 2013

  7. Narsimha A. Mettu says:

    what is the way out to preference shareholders if the company is not redeeming preference share on maturity, preference share are redeemable. what is the way available to preference shareholder to get his shares redeemed.

  8. Subha Joseph says:

    do the company need to provide in books for dividend on cumulative preferred stock on an annual basis?

    what if the company do not have profit in some years?

  9. Ujwal Bhandari says:

    Dear sir,

    The post has been very helpful.

    I would like to know that if the Share capital clause of the Memorandum of the company does not state Preference share as a part of Authorised Share Captial, then may the Memorandum be altered and Preference shares be issued accordingly? if yes then is there a requirement to File Form SH-7 if the authorised shares are not increased but the un-issued equity shares are converted to preference shares?


  10. Krunal Shah says:

    No shareholders approval is required in case of rights issue. Shareholders approval required only for 62(1)(b) and 62(1)(c) and not 62(1)(a). –

  11. Krunal Shah says:

    No shareholders approval is required in case of rights issue.
    Shareholders approval required only for 62(1)(a) and 62(1)(c) and not 62(1)(a).

  12. mahesh says:

    The step wise procedure given above is for Right issue, If normal issue of pref share are to be issued then which forms have to be file with ROC?
    Thank u

  13. Smita says:


    In case of right issue of equity shares, one need not to get approval from shareholders but in case of right issue of preference shares, shareholders approval is required because of rule 9 of Companies (Share Capital & Debentures) Rules, 2014?

    1. K.S.V.N.S. K. RAO says:

      in case of Rights Issue of Equity Shares no approval of Members required. 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.

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