Preference shares are suitable for investors who want a steady source of income without taking on the risks of volatility in the common shares. Preference shareholders also give up the upside potential of common shares as preference shares do not change their value substantially in any given holding period.
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;
INDICATIVE LIST OF DOCUMENTS TO BE CHECKED
- Articles of association
- Financial Statement
- Notice along with Explanatory Statement
- Minutes of General meeting
- Register of members
CHECKLIST FOR ISSUE OF PREFERNCE SHARES
| S.NO | PARTICULARS | COMPLIANCE |
| 1. | Authorization in AOA | A company is authorized by its articles to issue preference shares. |
| 2. | Time period | The preference shares shall be liable to be redeemed within a period not exceeding twenty years. A company engaged in the setting up and dealing with or infrastructure projects may issue preference shares for a period not exceeding thirty years, subject to the redemption of a minimum of ten percent of such preference shares per year from twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders. |
| 3. | Authority | The issue of preference shares has been authorized by passing a special resolution in general meeting of the company |
| 4. | EGM notice | The explanatory statement to be annexed in notice of general meeting shall provide complete material facts concerned with and relevant to issue of preference shares including details mentioned in sub rule (3) of rule 9 of companies (Share Capital and Debentures) Rules 2014 |
| 5. | No sub sting default | 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 the Act or in payment of dividend due on any preference shares. |
| 6. | Matters of resolution | The resolution for issue of preference shares has set out the following matters :(a) Priority with respect to payment of dividend or repayment of capital vis-à-vis equity shares
(b) Participation in surplus dividend (c) Participation in surplus assets and profits, on winding up which may remain after the entire capital has been repaid (d) Payment of dividend on cumulative or non-cumulative basis (e) Conversion of preference shares into equity (f) Voting rights (g) Redemption of preference shares
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| 7. | Dividend | All the terms of issue of Preference Shares other than those prescribed, such as when the preference dividend shall be due etc. are clearly defined |
The resolution for issue of preference shares has set out the following matters:
(a) Priority with respect to payment of dividend or repayment of capital vis-à-vis equity shares
(b) Participation in surplus dividend
(c) Participation in surplus assets and profits, on winding up which may remain after the entire capital has been repaid
(d) Payment of dividend on cumulative or non-cumulative basis
(e) Conversion of preference shares into equity
(f) Voting rights
(g) Redemption of preference shares.
| S.NO | PARTICULARS | COMPLIANCE |
| 1. | Redeem out of | The preference shares can be redeem only out of the profits of the company or out of proceeds of fresh issue of shares made for this purposes. |
| 2. | Shares fully paid-up | They should be fully paid-up |
| 3. | Capital redemption reserves | Shares redeem out of distributable profits then sum equal to nominal amount of shares redeem shall be transferred to Capital redemption reserve. |
| 4. | Treatment of premium | If premium payable on redemption of any preference shares must be provided only out of profits of the company |
| 5. | Financial Statements | In case of such class of companies whose financial statement comply with the accounting standards, the premium payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed. And for every other company, such premium 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
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