PREFERENCE SHARES

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:

  • Explanation (ii) to section 43 of the Companies Act, 2013 (‘the Act’) defines the term Preference Shares.

“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;

  • Further, as per Explanation (iii) to section 43, when a certain class of shares has either of the following features, the same shall be deemed to be preference shares.

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:

  • 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.

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:

  • 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

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:

  • Company’s Articles should contain such clause allowing issue of Preference Shares
  • Company’s Memorandum Should have the Preference Shares as a part of Authorised Capital
  • 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
  • Obtain the prior approval of the Shareholders, by way of a Special Resolution
  • Valuation Report to be taken to arrive at issue price

Information to be given to the Shareholders in Explanatory Statement

  • The size of the issue and number of preference shares to be issued and the 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 the 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 the 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

Particulars to be set out in the Resolution to be passed to issue Preference Shares

  • 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

Redemption of preference shares

Meaning:

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:

  • 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
  • In case of such class of companies as may be prescribed  under Sec 133 of the Companies Act, 2013 and whose financial statements comply with the accounting standards.

(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.

  • In a case not falling under the class of Companies as mentioned 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.

Inability to redeem the redeemable Preference Shares

  • Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf,issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed:
  • The Tribunal shall order the company to immediately redeem the preference shares held by the shareholders dissenting to such arrangement.
  • The issue of preference shares for purpose of redemption of unredeemed preference shares (along with the dividend) shall not be considered as an increase in the share capital of the company

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