Issue and Redemption of Preference Shares

Preference shares commonly  known as preferred stocks are the kind of shares that hold certain prior benefits. Preference shares are released to rise capital of the company which is known as preference share capital. The preference share holders are given preferential treatment is respect of payment of dividend. They are having priority not only in respect of receiving payment of dividend but also in receiving the proceeds that are realized from the sale of company’s assets during the course of liquidation of the company prior to equity shareholders.

ISSUE OF PREFERENCE SHARES

Pre Conditions for Issue of Preference Shares-

According to Section 55 of the Companies Act, 2013,

• A company cannot issue irredeemable preference shares.
• The preference shares issued shall be liable to be redeemed within a period not exceeding 20 years from the date of their issue.

However, company engaged in infrastructure project may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to minimum 10% of preference shares shall be redeemed from the 21^st year or onwards on a proportionate basis at the option of the preference shareholders.

Points to be kept in mind before the issue of preference shares-

1. Articles of Association must be authorised. If not, first it must be altered.

2. There must be no subsisting default in the redemption of preference shares issued either before or after the commencement of the Act.

3. There is no subsisting default in the payment of dividend due on preference shares.

Steps to issue preference shares-

> CONVENING OF BOARD MEETING: The Company shall give notice of 7 days for the convening of board meeting and further call the board meeting where following agendas to be approved:

• • Approve the terms of the allotment of preference shares
  • Issue notice for calling extra-ordinary general meeting
  • Authorization to file E-form MGT-14

> CONVENING OF GENERAL MEETING: After giving 21 days’ notice or shorter notice, as the case may be, the Company shall convene general meeting where there is a need to pass special resolution for the issue of preference shares.

Once the special resolution is passed in the general meeting, there is need to circulate letter of offer to the shareholders via registered post or speed post.

> FILING OF FORM MGT-14– E-form MGT-14 needs to be filed with the registrar within 30 days of the passing of the resolution. Following attachments are required-

• • Explanatory statement of the notice convening general meeting
  • Copy of the special resolution passed in the meeting
  • Extract of minutes of the general meeting.

> On circulation of offer letter, the company receives either the acceptance of the offer or rejection or renunciation of the rights from the members to whom the offer has been sent.

> CONVENING OF SECOND BOARD MEETING: After the receipt of subscription money, the Company shall give notice of 7 days for the convening of board meeting and further call the next board meeting where following agendas to be approved:

• • Approval for allotment of preference shares on the basis of share application money received.
  • Issue of share certificate
  • Authorization to file E-form PAS-3
  • Authorization for entry in the register of members

> FILING OF FORM PAS-3 – E-form PAS-3 needs to be filed with the Registrar within 30 days of passing of the resolution for allotment of shares. Following attachments are required-

• • Resolution approving allotment of shares
  • List of Allottee

> ISSUE OF SHARE CERTIFICATE: The Company shall issue share certificate within 2 months from the date allotment of the shares.

REDEMPTION OF PREFERENCE SHARES:

A Company can redeemed its preference shares only on the terms on which they were issued or as varied after the due approval of shareholders as per section 48.

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.

According to Section 55 of the Companies Act, 2013, preference shares can be redeemed as follows-

• Out of the profits available for distribution to its shareholders.
• Out of the proceeds of fresh issue of shares made solely for the purpose of redemption.

Where such preference shares are redeemed out of the profits available for distribution to shareholders, a sum equal to nominal amount of the shares to be redeemed be transferred to Capital Redemption Reserve account(CRR).The CRR shall be treated as paid up share capital of company.

Where preference shares are redeemed out of the proceeds of fresh issue of shares, the company shall issue shares equal to the face value of redeemable preference shares.

No preference shares are redeemed unless they are fully paid-up.

PREMIUM ON REDEMPTION OF PREFERENCE SHARES

Premium payable on redemption of Preference shares must be provided out of the profits of the Company only.

However, premium payable on Preference shares can be provided out of Securities Premium Account in addition to P&L Account in following cases-

• Redemption of any preference shares issued on or before the commencement of this Act
• Where the Company does not comply with the accounting standards.

It may also happens that sometimes the company is not in a position to redeem its preference shares as on the due date  or is unable to pay dividend due on the preference shares. In such scenario, company may redeem such unredeemable preference shares by a further issue of such redeemable preference shares only after obtaining consent of 3/4^th in value of such preference shares and after obtaining approval from NCLT on a petition made by it in this behalf.

The Tribunal shall order the redemption of preference shares held by such person who have dissented to issue further redeemable preference shares.