Issue & Redemption of Preference Shares – Companies Act 2013

Section 55 of the Companies Act, 2013 read with Rule 9 of the Companies Act (Share Debt and Capital), 2014 allows the Company to issue preference redeemable shares. Section 55 (1) imposes a ban on the issuance of irredeemable preference shares. This article provides an insight into the issue & redemption of preference shares under the Companies Act 2013.

Period of Redeemable Preference Shares 

In terms of Section 55 (2) of the Act, a limited share company may issue preference shares which must be used for a period not exceeding 20 years from the date of issue. A company that participates in the establishment and management of infrastructure projects may issue preferential shares for more than 20 years but not more than 30 years, subject to at least 10% use of those shares annually from year 21 onwards or earlier, equally, at the discretion of preference shareholders.

The term “infrastructure projects” means the infrastructure projects referred to in Schedule VI of the Companies Act, 2013.

Procedure for Issuing Preferences 

• Check whether the Articles of Association contain a preferential issuance clause. If not, amend AOA first. 
• Call a Board Meeting for the following purposes: Increase the budget of the Authorized Preferences, if required; Authorizing the issuance of preferred shares; Calling a General Assembly for the approval of shareholders. 
• Convene a General Assembly for the following purposes: 
  • To increase the preferred budget allocation, if required;
  • To authorize the issuance of preferred shares in the form of a Special Resolution.
• File form MGT-14 with the Registrar of Companies within 30 days of shareholder accreditation and a copy of the Special Resolution and Explanatory Statement. 
• Take the Application Fee for preferred shares through bank channels 
• Assign preferred shares within 60 days from the date of receipt of the application fee. Assignments may be made by the board or any committee or any other authorized person. 
• Form PAS-3- file within 15 days or 30 days as the case may be, from the date of distribution.
• A Share Certificate (Form SH-1) must be issued to potential shareholders within 2 months from the date of allocation.

Preferred Shares Redemption 

The Company may use its preferred shares only on the terms provided:- 

(a) for a specified period or event; or 

(b) at any time at the discretion of the company; or 

(c) at any time at the discretion of the shareholder. 

Only popular fully paid shares are allowed to be used. Following are the usages of the preferred shares: 

• Company profits that could be acquired for dividends or
• Income derived from a new issuance of shares intended for redemption purposes; New stock exchanges can be equally and preferred or both.

Redemption out of Company Profits 

When shares of preference are proposed to be used for corporate profits, it will be required, for that benefit, to transfer, an amount equal to the maximum number of shares to be used, the reserve, to be called a Capital Redemption Reserve Account, and the provisions of this Act in regards to share capital reduction apply as if Capital Redemption Reserve Account were paid-up. The capital redemption reserve account may be used by the company, in payment of non-issued company shares which will be provided to company members as fully paid shares.

Where the Company can’t redeem preferential shares? 

When the Company is not in a position to redeem any preferred shares or pay dividends, if any, of those shares following the issuance terms, those shares shall be termed ‘preferred shares not purchased’. The Company, with the consent of the 3 / 4th shareholders of the preferential shares and with the approval of the National Company Law Tribunal (NCLT) on its appeal, has issued other applicable preference shares equal to the required amount, including the available budget, in respect of unused preference shares, and in the case of those preferential buyable shares, the unused preference shares will be deemed to have been used. The NCLT will order the immediate use of popular shares held by those individuals who have not approved the issuance of popular usable shares. 

Final words 

Preferential shares are the complete tools of the company seeking investment without compromising the voting rights and control of the Company. At the same time, it offers preferred shareholders a steady income and dividend value and returns. Hope you understood the issue & redemption of preference shares under the Companies Act, 2013.