What is Preference Share?
Preference share capital means a part of share capital which carries or would carry a preferential right with respect to:
√ Payment of dividends, either as a fixed amount or amount calculated at a fixed rate and
√ repayment, in the case of a winding up [Section 43]
Types of Preference Share
1. Cumulative and Non-Cumulative Preference Shares
2. Convertible and Non-Convertible Preference Shares
3. Participating and Non-Participating Preference Shares
4. Redeemable and Irredeemable Preference Shares
Voting Right [Section 47(2)]
Preference Shareholders have a right to vote only on resolutions placed before the company which:
√ Directly affect the rights attached to their preference shares
√ Any resolution for the winding up of the company
√ Any resolution for the repayment or reduction of its equity or preference share capital
Voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company.
Further, 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. [Section 47(2)]
Dividend on Preference Shares
Approval of Board for declaration and payment of dividend is required. For payment of dividend Current year’s profit of the Company after providing for depreciation, Undistributed or accumulated profits of the previous years after providing for depreciation (any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded), Money provided by CG & SG for the payment of dividend by the company in pursuance of a guarantee given by that Government can be utilized for payment of dividend. Further, for payment of dividend, other remaining procedural requirement like opening of bank account, restrictions on payment of dividend out of reserves etc., will continue to apply.
Issuance of Preference Shares- [Section 55]
Irredeemable preference shares are prohibited under the Act. Company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as given below.
Company engaged in setting up and dealing with ‘infrastructural projects’ (defined under Schedule VI of the Companies Act, 2013) 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 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
Conditions/Procedure for Issuance of Preference Shares
a. Ensure that Articles authorises the issuance of Preference Shares
b. Ensure Authorized capital of the company bifurcated into equity share capital and preference share capital.
c. Ensure that there is no subsisting default in the redemption of preference shares or in payment of dividend due on any preference shares.
d. Convene Board Meeting to consider the issuance of preference shares
e. Issue the notice of General Meeting along with the explanatory statement
f. Convene General Meeting for approval of shareholders by way of Special Resolution
g. File e-form MGT-14 within 30 days of passing of resolution
h. Finalization of basis of Allotment of Preference Shares by Board or Committee
i. File e-form PAS-3 within 30 days of allotment
j. Issue share certificate within 2 months of allotment
k. Make entries in the Register of Members maintained under section 88
Resolution to set out certain Particulars
(a) Priority with respect to payment of dividend or repayment of capital;
(b) Participation in surplus fund;
(c) Participation in surplus assets and profits, on winding-up;
(d) Payment of dividend on cumulative or non-cumulative basis,
(e) Conversion of preference shares into equity shares;
(f) Voting rights;
(g) Redemption of preference shares.
Explanatory statement to special resolution to set out certain particulars
(a) The size of the issue and number and nominal value of each share;
(b) The nature of such shares;
(c) The objectives of the issue, the manner of issue of shares;
(d) The price and the basis on which price has been arrived at;
(e) The terms of issue, including terms and rate of dividend on each share etc;
(f) The terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion;
(g) The manner and modes of redemption, the current shareholding pattern of the company, and the expected dilution in equity share capital upon conversion of preference shares.
Procedure for Variation of Terms and Conditions of Preference Shares [Section 48]
♦ Ensure that the terms of issue should not prohibit Variation.
♦ Take consent in writing of preference shareholders holding not less than three-fourths of the issued shares or by means of a Special Resolution passed at a separate meeting of the holders of preference shareholder
♦ If variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained
♦ File Form MGT-14 within 30 days of passing the Resolution.
♦ Where the holders of not less than ten percent of the issued shares of a class did not consent to such variation, then they may apply to Tribunal to cancel the variation. The decision of Tribunal shall be binding.
♦ The Company shall, within 30 days of the order of Tribunal, file a copy thereof with Registrar.
Redemption of Preference Shares [Section 55]
♦ The preference shares may be redeemed at a fixed time or happening of a particular event/ Any time at the company’s option/ Any time at the shareholders option
♦ The company may redeem the preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under Section 48
♦ Preference Shares shall be redeemed out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for such redemption;
♦ no such shares shall be redeemed unless they are fully paid;
♦ If they are proposed to be redeemed out of the profits of the company, a sum equal to the nominal amount of the shares to be redeemed, shall be transferred out of such profit to Capital Redemption Reserve Account.
♦ The premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account.
♦ The notice of redemption of preference shares shall be filed with the Registrar in Form SH-7 within 30 days of redemption of preference shares.
when a company is not in a position to redeem any preference shares or to pay dividend as per the terms of issue it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed. Such further issue shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the Company. [Section 55 (3)]