Learn the procedure for redemption of preference shares under the Companies Act, including board resolutions, payments, and filings with the Registrar of Companies.
Redemption of Preference Shares means the repayment to the shareholders of preference share capital. 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 and the preference shares may be redeemed-
i. at a fixed time or on the happening of a particular event
ii. any time at the company’s option or
iii. any time at the shareholder’s option.
Provisions under Companies Act, 2013
According to Section 55 of the Companies Act, 2013
(1) No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable.
(2) A company limited by shares may, if so authorised by its articles, 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 may be prescribed:
Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders:
Provided further that—
(a) no such shares shall be redeemed except 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 the purposes of such redemption;
(b) no such shares shall be redeemed unless they are fully paid;
(c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and
(d) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed:
Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.
(ii) in a case not falling under sub-clause (i) above, 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, before such shares are redeemed.
Procedure for Redemption
1. Prior Intimation about Board Meeting to the Stock Exchange [Regulation 50 of the SEBI (LODR), 2015]
Listed entities shall give prior intimation to the stock exchange of at least two working days in advance, excluding the intimation date and the Board Meeting date in which the matter regarding the redemption of preference shares is to be taken.
2. Convene a Meeting of Board of Directors
- Issue notice of Board Meeting to all the Directors of the Company at their address registered with the Company at least 7 days prior to the date of meeting.
- The Notice must include the Agenda and Notes to the Agenda.
- Hold a Meeting of Board of Directors and pass the necessary Board Resolution.
- To approve the redemption of preference shares in any of the following ways-
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- Redemption out of the profits of the Company.
- Redemption out of the fresh issue of Securities.
- Combination of Both.
- If the company’s non-convertible preference shares are listed on an exchange, determine the record date in accordance with Regulation 60 of the SEBI (LODR) 2015.
- To approve transfer of an amount equal to the nominal amount of shares to be redeemed to the Capital Redemption Reserve, if shares are proposed to be redeemed out of the profits of the company
- To authorize the company’s Company Secretary, Chief Financial Offier, or any director to file the redemption notice with the ROC.
- If the company’s non-convertible preference shares are listed on any of the Stock exchange, then it has to give prompt information to the exchange related to any action taken for redemption of these shares. Other than this, such a company has to give advance notice to the stock exchange of a minimum of 7 working days excluding the date of intimation and record date.
3. Payment of Redemption Amount
Company shall make the payment of the redemption amount and the premium amount (if any) to the redeemable preference shareholders.
4. Transfer of Amount to Capital Redemption Reserve Account
Where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account.
5. Entries in the Register of Members
Company shall make necessary entries in the Register of Members in Form MGT-1 within 7 days from the date of Board Meeting in which the redemption was approved.
6. Intimation to Registrar of Companies
Company shall file a notice for the redemption of preference shares with ROC in Form SH-7 within 30 days from the date of such redemption along with the following documents-
i. Certified true copy of board resolution authorizing redemption of redeemable preference shares is displayed and mandatory in case of redemption of redeemable preference shares
ii. Altered articles of association is mandatory in case the same are altered
iii. Any other information can be provided as an optional attachment(s).
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