Preference shares under New Cos Act - 19 FAQ You need to know..

Preference shares under Cos Act 2013 - 19 FAQ You need to know.. 

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Conditions to be complied with before issuing Preference shares..

Redemption of shares after 30 years is possible now !

What is the kind of shares that can not be redeemed?

Register to be maintained for Preference shares.. 
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PREFERENCE SHARES AS PER COMPANIES ACT 2013

There are two kinds of share capital in a company limited by shares, viz.  

i) Equity share capital; and              

ii) Preference share capital.

An analysis on the provisions relating to preference shares, as per Companies Act 2013, is being made below on a question and answer format.

1. Which section defines preference share capital in the Companies Act 2013?

Explanation to section 43(b) defines preference share capital.

2.  What is preference share capital?

Preference share capital means that part of the issued share capital of the company which carries or would carry a preferential right with respect to –

a)      Payment of dividend

b)     Repayment of the amount of the share capital paid-up or deemed to have been paid up

3.  Is there any additional rights attached to preference share capital?

In addition to their preferential rights, the following rights are also attached to the preference share capital.

 In  respect of dividend -  It has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right.

 In respect of capital – It has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

4. Whether preference shares be issued on irredeemable basis?

No company shall issue any preference shares which are irredeemable.

5.  What are the conditions  to be complied with before issuing preference shares?

a) Articles of Association must authorize to issue preference shares

b) Approval of members is sought by way of special resolution in the general meeting

c) At the time of issue of preference shares,

- there should not subsist default in the redemption of preference shares issued either before or after the commencement of 2013 Act.

- no payment of dividend due on any preference shares

6. What are the regulations that are to be included in the Articles of Association of a company, which intends to issue preference shares?

The regulations in respect of the following matters relating to preference shares are to be included:

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 shares;

f)       Voting rights;

g)      Redemption of preference shares.

7. What are the minimum details that are required to be included in the explanatory statement to be annexed to the notice of the general meeting for issue of preference shares?

The following are required to be included in the explanatory statement.

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

b)     Nature of such shares viz. cumulative or non-cumulative, participating or non-participating, convertible or non-convertible.

c)      Objectives of the issue.

d)     Manner of issue of shares.

e)      Price at which such shares are proposed to be issued.

f)       Basis on which the price has been arrived at.

g)      Terms of issue, including terms and rate of dividend on each share, premium etc.

h)     Terms of conversion, if convertible.

i)       Terms of redemption, including the tenure of redemption, redemption of shares at premium

j)       Manner and modes of redemption.

k)     Current shareholding pattern of the company.

l)       Expected dilution in equity share capital upon conversion of preference shares.

8. What is the maximum period upto which a company limited by shares, can issue redeemable preference shares?

Not exceeding 20 years from the date of issue.

9. Whether any register has to be maintained?

Yes, Register of Members maintained under section 88 shall contain the particulars in respect of such preference shareholders.

10. On what terms a company may redeem its 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 under section 48 of the Act.

11. Whether there is any exemption from issuing shares on redeemable basis for a period exceeding 20 years?

A company may issue preference shares for a period exceeding 20 years but not exceeding 30 years for infrastructure projects (Specified in Schedule VI).

However, it is subject to redemption of 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.

12. What are the sources for redemption of preference shares?

Redemption of preference shares shall be made only from the following;

i)  Out of the profits of the company which would otherwise available for dividend.

ii) Out of the proceeds of a fresh issue of shares made for the purpose of such redemption.

13.  Which shares shall not be redeemed?

Partly paid up shares shall not be redeemed.

14.  When shares are redeemed out of profits, what is to be done?

A sum equal to the nominal amount of the shares to be redeemed is to be transferred to a reserve called “Capital Redemption Reserve”.

15. The premium on redemption shall be paid out of which resources?

In case of such class of companies as may be prescribed and whose financial statements comply with the accounting standards.

i) Premium payable on redemption shall be provided out of the profits of the company, before the shares are redeemed.

ii) Premium payable on redemption of any preference shares issued on or before the commencement of 2013 Act, shall be provided out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.

16. What is the position of a company when it is unable to redeem any preference shares?

When a company is unable to redeem any preference shares, it can issue further redeemable preference shares equal to the amount due, including the dividend thereon subject to the following conditions;

i) With the consent of the preference shareholders holding three-fourths in value; and

ii) With the approval of the Tribunal on a petition made by it in this behalf.

17.  What would be the status of unredeemed preference shares?

On the issue of further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

18. What happen to the preference shareholders who are dissenting to further issue of redeemable preference shares?

The Tribunal shall, while giving approval, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

19. For what purpose Capital Redemption Reserve can be utilized?

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.

CS Balaji G

Company Secretary