ISSUE AND REDEMPTION OF PREFERENCE SHARES

Rules 9 of the Companies (Share Capital and Debentures) Rules 2014 explain procedure for issue and redemption of preference shares supplemented by Rule 10 thereof.

Issue of Preference Shares:

A company having a share capital may, if so authorised by its articles, issue preference shares subject to the following conditions, namely:-

(a) The issue of preference shares has been authorized by passing a special resolution in the general

meeting of the company.

(b) 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.

Terms and Conditions in Resolution:

A company issuing preference shares shall set out in the resolution, particulars in respect of the following matters relating to such shares, namely:-

(a) the priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares;

(b) the participation in surplus fund;

(c) the participation in surplus assets and profits, on winding-up which may remain after the entire capital has been repaid;

(d) the payment of dividend on cumulative or non-cumulative basis;

(e) the conversion of preference shares into equity shares;

(f) the voting rights; and

(g) the redemption of preference shares.

Explanatory Statement annexed to the Notice:

The explanatory statement to be annexed to the notice of the general meeting, inter-alia, provide the complete material facts concerned with and relevant to the issue of preference shares, including-

(a) The size of the issue and number of preference shares to be issued and nominal value of each share;

(b) The nature of such shares i.e. cumulative or non – cumulative, participating or non – participating, convertible or non – convertible;

(c) The objectives of the issue;

(d) The manner of issue of shares;

(e) The price at which such shares are proposed to be issued;

(f) The basis on which the price has been arrived at;

(g) The terms of issue, including terms and rate of dividend on each share, etc.;

(h) 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;

(i) the manner and modes of redemption;

(j) the current shareholding pattern of the company;

(k) the expected dilution in equity share capital upon conversion of preference shares.

Register of Members:

Where a company issues preference shares, the Register of Members maintained under section 88 shall contain the particulars in respect of such preference share holder(s).

Listing of Preference Shares:

A company intending to list its preference shares on a recognized stock exchange shall issue such shares in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.

In wake of Sahara Case, term intending to list seems inappropriate. However, Section 42(2) may help us to understand.

Redemption of Preference Shares:

A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders.

The preference shares may be redeemed:-

(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.

Issue and redemption of preference shares by company in infrastructural projects:

A company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum ten percent of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.