Preference shares as the term implies are the shares that having priority over the equity shares. These shares contain a preferential right to receive the dividend as are declared by the company on first priority basis. They are not only having a Preference in receive a dividend on the priority basis but they also have a Preference in receive the proceeds that are realized from the sale of the company’s assets during the course of liquidation prior to pay to equity shares.
In other words, preference shares are the shares that carry or would carry a preferential right with respect to:
1. Payment of dividend, either fixed amount or at a fixed rate and
2. Repayment of the amount of paid-up capital share capital paid up or deemed to have been paid up, in the scenario of winding up of the company or repayment of capital.
Prerequisites for the Issue of Preference Shares
Prior to issuing preference shares, there are a few checkpoints that need to be observed and thereafter the issue process for preference shares can be initiated. On this note the prerequisites to be observed are as follows:
1. Check whether the nominal capital of the company is bifurcated into equity share capital and preference share capital.
2. Review the articles of association to verify that there are provisions enshrined relating to the issuance of preference shares.
3. Ensure that there are no subsisting defaults in the payment of dividend due on any preference share at the time of issue of preference share.
4. Take note that there are no subsisting defaults in the redemption of preference shares already issued at the time of making an issue of preference shares.
Once these aforementioned prerequisites are satisfied then the process for the issue of preference shares can be initiated.
Conditions for Issue of Preference Shares
At the time of issuing preference share, there a few conditions which need to be taken care of and thereafter complied in true letter and spirit. In light of the same the conditions for the issue of preference share are as follows:
1. The issue of preference shares must be authorized via a special resolution passed in a general meeting of the company.
2. Fulfil the prerequisites as already discussed above.
3. The company issuing preference shares should maintain a register under Section 88 of such preference shareholders containing therewith the respective particulars of such shareholders.
Tenure for Preference Shares
As per section 55 of the Act, a company can issue only redeemable preference shares i.e., a company is not allowed to issue irredeemable preference shares. On this note, it is mandatory for every company issuing preference shares to redeem them within a period of 20 years from the date of issue.
A company may issue preference shares for a period exceeding 20 (Twenty) years for infrastructure projects. Subject to the redemption of a minimum 10% of such preference shares per year from the 21 (twenty-first) year onward or earlier, on a proportionate basis, at the option of preference shareholder.
The procedure for the issue of Preference share is given under Section-62 of the Companies Act 2013. It is significant to highlight that issue of share can be in three modes:
1. Right issue of shares [Section- 62(1) (a)]
2. Preferential allotment of shares. [Section- 62(3) (c) and Section-42]
3. Private Placement of shares. [Section-42)
Step to Issue of Preference Shares
Step 1- Call the Board Meeting for Issue of Preference Share by giving 7 days’ notice to Director
Step 2- Conduct the Board Meeting and
Step 3- Hold the general meeting and Pass Special Resolution for issue preference of shares.
Step 4- Filed the MGT-14 with ROC before issue of Letter of Offer to any person (Whether member or not)
Step 5- Circulate Letter of Offer.
On Receive acceptance/renunciations/rejection of rights from members to whom the offer has been sent & also from persons in whose favour right was renounced.
Step 6- File the GNL-2 for letter of offer, prospector, private placement.
Step 7- Call the Board meeting for Allotment of Preference Share.
Step 8- Conduct the Board Meeting and
Step 9- Filing of PAS 3 with ROC within a period of 30 days.
Step 10- Issue of Share Certificate to person whom share was allotted.
Point to be mentioned in a special resolution passed for the issue of preference shares
As mentioned above for issuing preference shares a special resolution is required to be passed and so the points to be mentioned in the special resolution passed for the purpose of issue of preference shares are as follows:
Content to be mentioned in the explanatory statement
The notice of the extraordinary general meeting shall be accompanied by an explanatory statement. The points that should be covered in the explanatory statement in this regard are as follows:
Points to be noted while allotment of preference shares
At the time of allotment of preference shares, the company should note the following points: