Issue and redemption of preference shares by company

Monisha Jain

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), when a certain class of shares have either of the following features, the same shall be deemed to be preference shares

–   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

–   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

Conditions for issue of preference shares

• As per section 55 of the Act, a company can issue only redeemable preference shares ie a company is not allowed to issue irredeemable preference shares. Further, it is mandatory for every company issuing preference shares to redeem it within a period of 20 years from the date of issue.However, a company may issue preference shares with a redemption period of more than 20 years time provided that a certain percentage of such shares are redeemed annually at the option of the shareholders
• In order to issue securities by way of private placement, the private company (‘the Company’) is required to circulate an offer letter to the selected group of people to whom the Company proposes to issue its shares.

Redemption of preference shares

• Fully paid-up preference shares can only be redeemed.
• Preference shares can be redeemed only out of the profits available for distribution to its shareholders or out of fresh proceeds of shares issued solely for the purpose of funding the redemption of the preference shares
• 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. The CRR shall be treated as the paid up share capital of the company for all purposes and can also be utilised for bonus issue of shares
• 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 (alongwith the dividend) shall not be considered as an increase in the share capital of the company