Meaning of Preference Shares:
Preference Shares are not defined in the Definition part of the Companies Act, 2013. However it has been defined in Section 43 of the Companies Act, 2013 as below:
“Preference Share Capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;
a) in addition to the preferential right to receive dividend, the shareholders have a right to participate either fully or to a limited extent in the capital not having preferential treatment
b) in addition to the preferential repayment of share capital in the event of winding up, the shareholders are entitled to participate either fully or to a limited extent in the surplus capital of the company available
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.
Tenure of Preference shares:
i) 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.
ii) A company may issue preference shares for a period exceeding twenty yearsbut up to thirty years for infrastructure projects, subject to the redemption of 10% of shares on an annual basis at the option of such preferential shareholders from 21st year onwards or earlier.
Methods of Issue of Preference Shares:
Conditions for issue of preference shares
Section 55 of the Act read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 made there under, requires a Company to meet with following conditions:
Information to be given to the Shareholders in Explanatory Statement
Particulars to be set out in the Resolution to be passed to issue Preference Shares
Redemption of preference shares
It is a process of repaying an obligation, usually at the prearranged amount. These shares are issued to the shareholders on terms that holders will at some future date be repaid the amount which they invested in the company.
The redemption date is the maturity date, which specifies when repayment takes place and is usually be mentioned in the agreement.
Conditions for Redemption:
(i) Premium payable on redemption shall be provided out of the profits of the company before the shares are redeemed.
(ii) Premium payable on redemption of any preference shares issued on or before the commencement of 2013 Act, shall be provided out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.
Inability to redeem the redeemable Preference Shares