All About Preference Shares

Basic Information

1. A company having a share capital may, if so authorized by its articles, issue preference shares subject to the following conditions, namely:-

• the issue of such shares has been authorized by passing a special resolution in the general meeting of the company
• the company, at the time of such issue of preference shares, has no subsisting default in the redemption of preference shares issued either before or after the commencement of this Act or in payment of dividend due on any preference shares.
• The shares shall be redeemed within a period of twenty years from the date of the Issue.

2. A company issuing preference shares shall set out in the resolution, particulars in respect of the following matters relating to such shares, namely:-

• the priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares;
• the participation in surplus fund;
• the participation in surplus assets and profits, on winding-up which may remain after the entire capital has been repaid;
• the payment of dividend on cumulative or non-cumulative basis.
• the conversion of preference shares into equity shares.
• the voting rights;
• the redemption of preference shares.

3. The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall, inter-alia, provide the complete material facts concerned with and relevant to the issue of such shares, including-

• the size of the issue and number of preference shares to be issued and nominal value of each share;
• the nature of such shares i.e. cumulative or non – cumulative, participating or non – participating , convertible or non – convertible
• the objectives of the issue;
• the manner of issue of shares;
• the price at which such shares are proposed to be issued;
• the basis on which the price has been arrived at;
• the terms of issue, including terms and rate of dividend on each share, etc.;
• 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;
• the manner and modes of redemption;
• the current shareholding pattern of the company;
• the expected dilution in equity share capital upon conversion of preference shares.

4. Where a company issues preference shares, the Register of Members maintained under section 88 shall contain the particulars in respect of such preference share holder(s).

5. A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act and the preference shares may be redeemed:-

• at a fixed time or on the happening of a particular event;
• any time at the company’s option; or
• any time at the shareholder’s option.

Kinds of Preference shares:

There are seven kinds of preference shares:

i. Redeemable Preference Shares:

Redeemable preference shares are those shares which are redeemed or repaid after the expiry of a stipulated period.

ii. Cumulative Preference Shares

Preference dividend is payable if the company earns adequate profit. However, cumulative preference shares carry additional features which allow the preference shareholders to claim unpaid dividends of the years in which dividend could not be paid due to insufficient profit.

iii. Non-cumulative Preference Shares

The holders of non-cumulative preference shares will get preference dividend if the company earns sufficient profit but they do not have the right to claim unpaid dividend which could not be paid due to insufficient profit.

iv. Participating Preference Shares

Participating preference shareholders are entitled to share the surplus profit of the company in addition to preference dividend.

v. Non-participating Preference Shares

Non-participating preference shareholders are not entitled to share surplus profit and surplus assets like participating preference shareholders.

vi. Convertible Preference Shares

The holders of convertible preference shares are given an option to convert whole or part of their holding into equity shares after a specific period of time.

vii. Non-convertible Preference Shares

The holders of non-convertible preference shares do not have the option to convert their holding into equity shares i.e. they remain as preference share till their redemption.

Methods of Issue of Preference Shares:

• Rights Issue under Section 62(1)(a)only to the existing Equity Shareholders; or
• ESOP Under Section 62(1)(b)specifically to the employees under a Scheme or
• Preferential Allotment under Section 62(1)(c)of the Companies Act, 2013 to any person subject to the adherence to Rule 13 of Companies (Share Capital and Debenture) Rule, 2014;
• Private Placement of Shares under section Section-42 read with the Rules made there under;

Conditions for Issue of Preference Shares

Procedure to issue Redeemable Preference Shares

Step I

Check whether Articles of Association of the Company authorize to issue redeemable preference shares

Step II

Valuation Report to be taken to arrive at issue price

Step-III

Issue 7 days prior notice and agenda for calling the Board Meeting

Step IV

Convene Board Meeting to consider issue of preference shares on right basis

• to approve draft letter of offer to be sent to existing equity shareholders
• to convene Extra Ordinary General Meeting for approval of shareholders

Step V

Issue 21 clear days prior notice and agenda to conduct the general meeting

Step VI

Convene AGM/EGM

• to take approval of shareholders by special resolution
• File e-form MGT-14
• Receive acceptance and renunciations of rights from members to whom offer has been made

Step VII

Conduct Board Meeting for Finalization of Allotment

• Allotment of Preference Shares by Board
• File e-form PAS-3
• Issue of share certificate

Conditions for Redemption:

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 proceeds of fresh issue of Shares solely for the purpose of funding the redemption of the preference shares
• Where the redeemable 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 utilized for bonus issue of shares.

Process for Redemption of Preference Shares:

Call Meeting of Board of Directors:

Issue Notice and Agenda of Board Meeting

Hold the Board Meeting:

• Pass Board Resolution for approval of Redemption of Preference Shares.
• Present Letter for redemption of Preference Shares before the members of the meeting.

File Form with Registrar:

• File SH-7 with Registrar within 30 days of passing of Resolution.
• Certified True copy of Resolution.
• Minutes of Meeting