Preference as the term implies are the shares that rank at a priority above the equity shares. It means and includes that part of the share capital the holders of which have a preferential right over payment of dividend (fixed amount or rate) and repayment of share capital in the event of winding up of the company.
Features of Preference shares
- Preferential right to receive dividend and in repayment in case of winding up
- No voting rights*
Preference shareholders do not enjoy voting rights like equity shareholders. But under certain circumstances voting rights will also be available to the preference shareholders of the company. Where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
Conditions of issue of Preference shares
A company having a share capital may issue preference shares subject to the following conditions, namely:-
- The issue of preference shares must be authorized by Article of Association of the Company.
- The Authorized capital of the company must be bifurcated into equity share capital and preference share capital.
- The company, at the time of such issue of preference shares, has no subsisting default in the redemption of preference shares or in payment of dividend due on any preference shares.
- The issue of such shares has been authorized by passing a special resolution in the general meeting of the company.
A company issuing preference shares shall set out in the resolution, particulars in respect of the following matters relating to such shares, namely:-
- 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.
The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall, inter-alia, provide the complete material facts concerned with and relevant to the issue of such shares, including-
- the size of the issue and number of preference shares to be issued and 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 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 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.
Modes of Issue of Preference Shares
- Right Issue of Shares. [Section- 62(1)(a)]
- Preferential Allotment of Shares. [Section- 62(3)(c) and Section-42]
- Private Placement of Securities. [Section-42)
Procedure of issuance of Preference Shares through Right issue
Under this mode, Company has to offer its preference shares to the existing equity shareholders first. Under this mode, the process of issue would be as follows:
- Convene Board Meeting
- to consider issue of preference shares on right basis
- to approve draft letter of offer to be sent to existing equity shareholders
- to convene Extra Ordinary General Meeting for approval of shareholders
- Convene Extra Ordinary General Meeting to take approval of shareholders by special resolution
- File e-form MGT-14
- Receive acceptance and renunciations of rights from members to whom offer has been made
- Finalization of Allotment
- Allotment of Preference Shares by Board or Committee or Concerned Employee/office
- File e-form PAS-3
- Issue of share certificate
Requirement of Registered Valuer’s Report
Registered Valuer’s Report is not required in case of right issue of shares but it is required in case of preferential issue.
Where convertible preference shares are offered on a preferential basis with an option to apply for and get equity shares allotted, the price of the resultant shares pursuant to conversion shall be determined-
(i) either upfront at the time when the offer of convertible securities is made, on the basis of valuation report of the registered valuer given at the stage of such offer, or
(ii) at the time, which shall not be earlier than thirty days to the date when the holder of convertible security becomes entitled to apply for shares, on the basis of valuation report of the registered valuer given not earlier than sixty days of the date when the holder of convertible security becomes entitled to apply for shares:
Provided that the company shall take a decision on price of resultant shares at the time of offer of convertible security itself and make such disclosure in explanatory statement.
Term of Issue of Preference shares
Section 55(2) provides that a company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue. However, a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum 10 % of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
Ban on Issue of Irredeemable Preference shares
Section 55(1) make it clear that No company limited by shares shall issue any preference shares which are irredeemable. So, every preference share must be redeemed as per its terms and conditions.
Variation in terms and condition of Preference shares
The terms and conditions of issue of preference shares can be changed, altered, modified or amended subject to the following conditions:
- There should be a provision with respect to such variation in the memorandum or articles of the company;
- In the absence of any such provision in the memorandum or articles, such variation should not be specifically prohibited by the terms of issue of the preference shares.
- The consent in writing of preference shareholders holding not less than three-fourths of the issued shares or by means of a special resolution passed at a separate meeting of the holders of the preference shares is sought;
- If variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation.
Redemption of Preference shares
A company may redeem its fully paid preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders:-
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company’s option; or
(c) any time at the shareholder’s option.
No preference shares shall be redeemed except
- out of the profits of the company which would otherwise be available for dividend.
- out of the proceeds of a fresh issue of shares made for the purposes of such redemption.