There are 2 types of share in any company first is Equity shares or Common Stock and second is Preference shares or Preferred stock. Equity shareholder are considered as real owners of the Company as they have voting rights in a company while preference shareholders don’t have voting rights on all resolutions in ordinary circumstances. However, where the dividend in respect of a 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. Preference shareholders are given priority in payment of dividend and repayment in case of winding up. The rate of dividend on equity shares fluctuate every year as it depends on the amount of profit available to the company. On the other hand, Preference Shares carry either fixed rate or fixed amount as dividend.
Issue of Preference Shares
Section 55 of the Companies Act, 2013 (‘Act’) read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 allows a Company to issue redeemable preference shares. Section 55(1) puts ban on issuance of irredeemable preference shares.
Term of Redeemable Preference Shares
According to Section 55(2) of the Act, 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.
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 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
The term "infrastructure projects" means the infrastructure projects specified in Schedule VI of the Companies Act, 2013.
Pre-conditions for issue of Preference Shares
The Articles of Association of a Company must authorize the Company to issue preference shares. If the Articles of Association is not authorizing or it is silent, then it must be amended first.
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 such shares has been authorized by passing a special resolution in the general meeting of the company. So the Company needs to take prior shareholders’ approval by way of Special Resolution.
- 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.
- 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.
Procedure for issue of Preference Shares
1. Check whether Articles of Association contains clause for the issuance of preference shares. If not, amend the AOA first.
2. Convene a Board Meeting for the following purposes:
- To increase Authorized preference share capital, if required;
- To approve issuance of preference shares;
- To convene General Meeting for taking approval of shareholders.
3. Convene General Meeting for the following purposes:
- To increase Authorized preference share capital, if required.
- To approve issuance of preference shares by way of Special Resolution;
4. File form MGT-14 with the Registrar of Companies within 30 days of approval of shareholders alongwith the Copy of Special Resolution and Explanatory Statement.
5. Take Application Money of preference shares through banking channels
6. Allot the preference shares within 60 days from the date of receipt of application money. Allotment can be done by the board or any committee or even any authorized person.
7. File form PAS-3 within 15 days or 30 days as the case may be, from the date of allotment.
8. Share Certificate i.e. (Form SH-1) is to be issued to the prospective preference shareholders within 2 months from date of allotment.
Redemption of Preference Shares
A company may redeem its preference shares only on the terms on which they were issued either:-
(a) at a fixed time or on the happening of a particular event; or
(b) any time at the company’s option; or
(c) any time at the shareholder’s option.
Only fully paid preference shares are allowed to be redeemed.
Preference shares shall be redeemed out of the following:
- Profits of the company which would otherwise be available for dividend or
- Out of the proceeds of a fresh issue of shares made for the purposes of such redemption; Fresh issue of shares can be of equity as well as preference or can be both.
Redemption out of the profit of the Company
Where Preference shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall apply as if the Capital Redemption Reserve Account were paid-up share capital of the company.
The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
Premium on Redemption of Preference Shares
Premium payable on redemption of Preference shares must be provided out of the profits of the Company only. However, in following two cases, premium payable on Preference shares can be provided out of Securities Premium Account in addition to P&L Account:
- Redemption of any preference shares issued on or before the commencement of this Act.
- If Company does not comply with the accounting standards.
Where Company unable to redeem 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 then such shares shall be referred as ‘unredeemed preference shares’.
A Company may, with the consent of the holders of 3/4th in value of such preference shares and with the approval of the National Company Law Tribunal (NCLT) 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 NCLT shall order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.
Preference shares are perfect instrument for a Company which is looking for an investment without diluting voting rights and control over the Company. At the same time, it offers the preference shareholders a fixed income and priority of dividend and repayment.