Preference Share with reference to any Company limited by shares means that part of the issued share capital which carries or would carry preferential right with respect to:-

  • Payment of dividend either fixed or calculated at fixed rate.
  • Repayment in case of winding-up or repayment of capital.

Section 55 of Companies Act, 2013 read with rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 deals with issue & redemption of preference share.

Procedure of the issue:-

  • Check whether issuing preference shares is authorized under the Articles of the Company or not, if it is not so authorized then first needs to amend the Articles of the Company.
  • Conduct Board Meeting and call the General Meeting for this purpose.
  • An Explanatory Statement shall annexed with Notice calling the General Meeting, and it shall contain the relevant facts regarding the issue such as:-
    • Size of the Issue, No. of Preference Shares, Nominal Value of the Shares
    • Nature of the shares i.e. Cumulative/Non-cumulative, Participating/Non-participating, Convertible/Non-convertible etc.
    • Objective & Manner of the issue.
    • Price at which shares are proposed to be issued & basis on which price has been arrived i.e. method of valuation etc.
    • Terms of issue, rate of dividend, terms & tenure of redemption.
    • Current shareholding pattern of the Company
    • Expected dilution of Equity Shares upon conversion (only if the nature of the issue is convertible preference shares).
  • Pass Special Resolution in the General Meeting and the Resolution shall contain the following information:-
    • Priority with respect to payment of dividend/repayment of the capital.
    • Participation in surplus funds, assets or profits on winding-up.
    • Payment of dividend on cumulative/non-cumulative basis.
    • Conversion of preference into equity.
    • Voting rights (limited to the matters related to preference shareholders only).
    • Terms of redemption.
  • File form MGT -14 to the ROC within 30 days of passing the resolution.
  • Make allotment of Securities & file form PAS – 3 to the ROC.
  • Maintain Register of Members as prescribed under section 88 of the Companies Act, 2013.
  • Pay stamp duty towards the Share Certificates issued to the Shareholders in accordance with State Stamp Laws.

Restrictions on issue of Preference Shares under the Act:-

There is a clear restriction on the Company to issue irredeemable preference shares. A Company shall redeem its preference shares within the time period of 20 years from the date of issue.

However if a Company could not redeem its preference share with-in this time period due to unavoidable reasons then it may pass Special Resolution with 3/4th Majority and file petition to the NCLT and on the order of NCLT may issue preference shares of same kind with similar rate of dividend for some time period instead of redemption of existing one.

Redemption of Preference Shares:-

Company may redeem its preference shares only on terms on which they were issued or may varied after approval of preference shareholders under section 48. Redemption may happen on:-

  • Completion of Fixed time/Arrival of particular event.
  • Any time at the option of the Company.
  • Any time at the option of the Shareholders.

Please note that if the preference shares are issued to person other than existing shareholders of the Company or employees of the Company i.e. if the issue is a ‘Preferential Allotment’ then can only be issued on price which is determined by the Valuation Report of the Registered Valuer and comply with Conditions mentioned under Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014 in addition to the conditions mentioned above.

{The author is a Company Secretary in Practice & can be reached at (M) 9811888288 (E)}

Author Bio

Qualification: CS
Company: Deepika Shukla & Co. (Company Secretaries)
Location: New Delhi, New Delhi, IN
Member Since: 18 Jan 2018 | Total Posts: 21
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September 2020