How to issue Non-Convertible Preference Shares as per Companies Act, 2013

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Introduction

As per Companies Act 2013 any class of shares that carry a preferential right with respect to payment of dividend and repayment or redemption of capital are called preference shares. Preference shares are of many types. One such type is Non-Convertible Preference Shares.

Non-Convertible preference shares are those shares which can not be converted into equity rather they shall be redeemed at the expiry of their tenure. Thus, they are called as redeemable preference shares. Holders of such class of shares do not have the right to obtain equity shares on their maturity. Such shares have the right to participate in any additional profits, after paying the equity shareholders.

Table of Content
 Introduction
Different types of preference shares
How to issue Non-Convertible Preference Shares?
Redemption of Preference Shares
Process For Redemption Of Preference Shares
Conclusion

Different types of preference shares

Different types of preference shares
  • Cumulative Preference Shares- Such type of shares are those whose arrears in dividend are carried forward in case of losses and thus cumulates and is paid before any other class of shares.
  • Non-Cumulative Preference Shares- It is just opposite of Cumulative Shares. Here the dividend doesn’t cumulates and is paid only when there are sufficient profits. No arrears are carried forward.
  • Redeemable Preference Shares – They are such class of shares that are redeemable at a future date at a prespecified price.
  • Non-Redeemable Preference Shares- This class of shares shall only be redeemed when the company undergoes liquidation process or winds up.
  • Convertible Preference Shares- This class of shares are those that gets converted into equity shares or common equity after a specific time at a pre decided price.
  • Non-Convertible Preference Shares- Shareholders of such class of shares do not possess the right to convert itself into equity shares.
  • Participating Preference Shares- The holders of such class of shares have the right to participate in surplus profits apart from fixed dividend. Thus after paying off equity holders they are entitled to participate in extra profits.
  • Non-Participating Preference Shares – Such type of share doesn’t provide any right to participate in any surplus profits. They get only fixed rate of dividend.
How to issue Non-Convertible Preference Shares as per Companies Act, 2013

How to issue non convertible preference shares?

  • To issue such class of shares make sure the Articles Of Association of the company gives permission to issue such type of shares else first the articles  of association needs to be altered accordingly.
  • Make sure the increased share capital is within the limits as specified in the Authorised share capital of the company, if the capital is increased take proper steps to alter the capital clause.
  • Also ensure that no subsisting default on payment of dividend exists on the date of issue of such new class of shares.
  • Non-Convertible Preference shares may be offered in a private company by these means-
    • Right Basis ;
    • By Preferential Issue

Note-

A company engaged in infrastructure business may issue preference shares for more than 20 years but not exceeding 30 years subject to the redemption of at least 10â„… from the 21st year onwards or earlier on proportionate basis at the option of preference shareholders.

If the issue is to be made on Right Basis-

  • When shares are issued to the existing shareholders in proportion to the capital paid by hold by them on that date it is termed as right issue of shares.
  • Shares issued under right issue shall be exercised by the person himself or may be renounced in favour of someone else unless the article provides otherwise.

The steps are as follows-

  • Issue a notice to all the shareholders calling a board meeting to consider the proposal of right issue of Non-Convertible preference shares. Comply with all provision of calling meeting and agenda accordingly.
  • Hold the meeting to perform the following functions-
  • Pass resolution about the list of members to whom such shares are to be issued, the price and number of shares to be issued.
  • For approving draft letter of offer.
  • For approving draft of share application and renunciation letter.
  • To authorise CS or any other officer to send the letter of offer to members.
  • To fix the day, date and time to hold a general meeting where SR shall be passed for issue of non convertible preference shares.
  • To authorise Director or CS to sign and issue notice of general meeting proposing such issue.
  • Letter of offer shall include the following-
  • No. Of shares offered
  • Offer period. (It should be between 15-30 days)
  • If the offer is not accepted within the offer period then it shall be deemed to have been declined.
  • It shall also include a statement of the right entrusted to that person or right of renunciation of shares to any other person.
  • Send atleast 21 days notice to the shareholders, directors, auditors and required person or a shorter notice after complying with related provisions.
  • Hold the General Meeting and pass SR by 3/4th majority for issue of preference shares on right basis.
  • Prepare the minutes of general meeting and get them signed.
  • File the copy of SR with the registrar in Form No MGT-14 under sec 117 of the act within 30 days of passing SR along with following attachments-
  • Copy of SR along with explanatory statement.
  • Notice of convening meeting
  • Report from the Registered Valuer
  • Any other attachment as prescribed from time to time.
  • Dispatch the letter of offer to the existing equity shareholders along with application form and draft renunciation letter. After receipt of acceptance or decline of the shareholders the shares shall be allotted to them as may deem fit.
  • Hold the meeting of the Board of Directors
  • Issue share certificate  in form SH-1 within 2 months from the date of allotment of shares.

If the issue to be made is on preferential basis-

  • Issue a notice of Board meeting and convene a board meeting considering the proposal to issue non convertible preference share and approving their price. Fix the day, date and time of general meeting for passing special resolution and also attach an agenda giving full details of the same like objective, size, manner, terms of issue and redemption etc.
  • Dispatch the letter of offer to the person to whom such shares are proposed to be issued.
  • After receiving application money call a board meeting by giving proper notice to consider the proposal for allotment of shares.
  • Convene the General Meeting, pass the special resolution by ¾ majority.
  • Thenafter prepare, sign and compile the minute of general meeting.
  • File the copy of SR with the registrar in Form No MGT-14 under sec 117 of the act within 30 days of passing SR along with following attachments-
  • Copy of SR along with explanatory statement.
  • Report from the Registered Valuer
  • Notice of convening meeting
  • Any other attachment as prescribed from time to time.
  •  In case the shares are in demat form inform the depository accordingly and if the shares are in physical form issue share certificate in form SH-1 under the seal of the company which shall be affixed in the presence of a) two directors as authorised by the board or b) a Company secretary or any other person as authorized.
  • Pay the stamp duty in accordance with the provision of the state.
  • Make the necessary entries in Register of members and Register of directors.

Redemption of Preference Shares-

Preference shares can be redeemed out of-

Redemption of Preference Shares-

Conclusion-

Thus all non-convertible preference shares are required to comply with the following guidelines and procedure. Non compliance may lead to penalty and fines. Where the company is unable to redeem its preference shares or to pay the dividend due on the preference shares, the company can replace  such amount of preference shares as may be necessary in order to meets its obligation towards dividend payment and also redemption of preference shares .

Lastly, in case of any doubt or dilemma, reach out to Legal Window, our proficient and skilled Chartered Accountants and Company Secretaries are always there to serve you with the best advice and guidance.

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