Statutory provisions regarding Issuance of preference shares: –
According to the provisions of Section 55 of the Companies Act 2013 a company limited by shares, if authorized by the Articles of Association [AOA] of the company may issue preference shares which are liable to be redeemed within 20 years from the date of their issue. No company shall be allowed to issue irredeemable preference shares.
Provided that the company engaged in setting up of infrastructure projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years for subject to the condition that redemption of a minimum ten percent of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
The company may issue preference shares under the Act subject to the following conditions:-
Provided that the company issuing preference shares shall incorporate the following matters in the resolution passed at the general meeting:-
1. The priority in respect of payment of dividend as well as repayment of capital.
2. The participation in the surplus dividend.
3. The participation in surplus assets and profits on winding up which may remain after the entire capital has been paid.
4. Payment of dividend on cumulative or non-cumulative basis
5. The conversion of the preference shares into equity shares.
6. The voting rights.
7. The redemption of preference shares.
Provided further that the preference shareholders shall be the member of the company and his/her name should be included in the register of members maintained by the company in form MGT-1 pursuant to Section 88 of the Companies Act 2013.The preference shareholders are the owners of the company, nonetheless they did not have the voting rights except certain circumstances as provided under the Act,
Under the following situation the preference shareholders have the right to vote,
The company may issue preference share after complying the above provisions under the following route:
1. Rights issue as per section 62
2. Preferential allotment
3. Private placement under section 42.
It should be noted that at the time of issue of preference share please ensure that there is authorized capital for preference share and if there is no authorized capital for preference share then amend the capital clause of Memorandum Of Association.
Redemption of Preference shares
In light of the above, the preference shares shall be issued up to maximum of 20 years or 30 years in case company setting up infrastructure projects. It is clear that before expiry of the term the shares should be redeemed or converted into equity shares depending on the terms and conditions. The following are the important provisions regarding redemption of preference shares:-