Is SH-7 Mandatory for CCPS Conversion?

Summary: The conversion of Compulsory Convertible Preference Shares (CCPS) into equity shares raises questions about compliance filings under the Companies Act, 2013, particularly the necessity of Form SH-7 and Form PAS-3. While PAS-3 is mandatory to report equity share allotments post-conversion, the requirement for SH-7 hinges on the company’s authorized share capital. SH-7 is essential only if the authorized share capital is insufficient to accommodate the converted equity shares, necessitating an increase in authorized capital. In this case, SH-7 must be filed under “Increase in share capital independently by the company” before filing PAS-3. Conversely, if the authorized capital is adequate, SH-7 is unnecessary, as the process involves reclassification rather than an increase in share capital. Certain scenarios like the consolidation or division of shares, redemption of redeemable preference shares, and conversion of stock to equity are often misconstrued as applicable for CCPS conversion but do not align with its requirements. Redemption involves cash outflow, which does not occur in mandatory CCPS conversion. Filing SH-7 incorrectly under these categories may lead to compliance errors. Thus, companies should evaluate their authorized capital structure before determining the need for SH-7. Where sufficient authorized capital exists, only PAS-3, with the “Conversion of preference share” option, is required, ensuring streamlined compliance.

Introduction: The conversion of Compulsory Convertible Preference Shares (CCPS) into equity shares is a structured process governed by the terms of issuance. However, there is ongoing professional debate regarding the appropriate compliance filings under the Companies Act, 2013, particularly the necessity of Form SH-7 and Form PAS-3 in the process.

Many professionals hold the view that:

1. Form SH-7 should be filed to reflect the reduction in preference share capital.
2. Form PAS-3 should be filed to record the increase in equity share capital post-conversion.

While PAS-3 is required to be filed to report the allotment of equity shares, the necessity of SH-7 depends on the authorized capital structure of the company.

Applicability of SH 7 in Conversion of CCPS:

Form SH-7 is primarily applicable in cases involving:

1. Increase in share capital independently by company
2. Increase in number of members
3. Increase in share capital with Central Government order
4. Consolidation or division etc
5. Redemption of redeemable preference shares
6. Cancellation of unissued shares of one class and increase in shares of another class

Below is an analysis of whether SH-7 is applicable in the case of CCPS conversion:

1. Increase in Share Capital Independently by the Company

• If the post-conversion equity capital exceeds the authorized share capital, SH-7 must be filed under this category to reflect the increase in authorized capital before allotting equity shares through PAS-3.
• However, if the authorized capital is sufficient, SH-7 is not required,

2. Increase in Number of Members, Increase in Share capital with Central Government order and Cancellation of unissued share of one class and increase in shares of another class – These are not relevant for conversion of CCPS into Equity

3. Consolidation or Division of Share Capital

• Some suggest filing SH-7 under this category by selecting “Convert” as a sub-option.
• However, this provision is specifically intended for the conversion of stock into equity shares and not for the conversion of preference shares into equity shares.
• Therefore, selecting this option would be incorrect.

4. Redemption of Redeemable Preference Shares

• This category does not apply, as CCPS conversion does not involve redemption, which typically involves a cash outflow. Instead, it is a mandatory conversion as per the terms of issuance, making SH-7 unnecessary under this category. 

Conclusion

The filing of SH-7 for CCPS conversion depends entirely on the company’s authorized share capital structure:

• If the authorized capital is insufficient to accommodate the converted equity shares, SH-7 must be filed under “Increase in share capital independently by the company” to enhance the authorized capital.

• If the authorized capital is sufficient, SH-7 is not required, as the process involves only a reclassification of share capital rather than an increase. The company need to file only PAS 3 by selecting the option “Conversion of preference share”