Issue Of Preference Shares By A Company

Preference shares represent a class of ownership in a company that typically grants holders priority over equity shareholders in terms of dividend payments and asset distribution during liquidation. Unlike equity shares, they often carry fixed dividends and limited voting rights, making them an attractive financing option for companies seeking to raise capital without diluting control.

Issuing preference shares under the Companies Act, 2013, offers companies a flexible funding mechanism while safeguarding shareholder rights through stringent procedural requirements. Adherence to Section 55 and Rule 9, along with timely filings, is crucial to mitigate legal risks. Companies should consult legal experts for tailored advice, especially for complex structures like convertible shares or infrastructure-related extensions. By following this structured process, businesses can effectively leverage preference shares for growth and financial stability.

Legal Framework and Basic Preconditions

In India, the issuance and redemption of preference shares are governed by the Companies Act, 2013, particularly Section 55, read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014. Additionally, if the issuance involves private placement, compliance with Section 42 of the Act and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 is mandatory, including valuation by a registered valuer under Rule 13 for preferential allotments. These provisions ensure transparency, protect investor interests, and maintain corporate governance standards.

The Companies Act, 2013, prohibits the issuance of irredeemable preference shares by companies limited by shares post its commencement.

Preference Shares must be redeemable within a maximum period of 20 years from issuance, with an extension to 30 years permitted for companies engaged in infrastructure projects, subject to annual redemption of at least 10% starting from the 21st year. Infrastructure projects are defined as per Schedule VI of the Act, encompassing sectors like transportation, energy, and telecommunications.

Categorization of Preference Shares:

Preference shares can be classified based on various factors:

1. Cumulative vs. Non-Cumulative: Dividends accumulate if unpaid in cumulative shares, but not in non-cumulative ones.
2. Participating vs. Non-Participating: Participating shares allow additional dividends from surplus profits.
3. Convertible vs. Non-Convertible: Convertible shares can be exchanged for equity shares under specified terms.
4. Redeemable: All must be redeemable as per the Act.

Redemption must occur from profits available for dividends or proceeds of a fresh share issue, with fully paid shares only. A Capital Redemption Reserve Account is created for redemptions from profits, treated akin to paid-up capital for certain purposes.

Process for Issuance of Preference Shares

The process for issuing preference shares involves preparatory checks, board and shareholder approvals, regulatory filings, and post-issuance compliance. This assumes a private company issuing via preferential allotment or private placement, as public issues involve additional SEBI regulations. Companies must ensure no defaults exist and that the Articles of Association (AOA) permit such issuance.

1. Verify Authorization in Articles of Association and Memorandum of Association (MOA)

Review the AOA to confirm it authorizes the issuance of preference shares. If the AOA is silent or restrictive, amend it through a special resolution at an Extraordinary General Meeting (EGM). File Form MGT-14 with the Registrar of Companies (ROC) within 30 days of the resolution, attaching the amended AOA.

If the authorized share capital needs augmentation to accommodate the new preference shares, pass an ordinary resolution to alter the Memorandum of Association (MOA) and file Form SH-7 with the ROC within 30 days.

2. Convene a Board Meeting

Hold a board meeting under Section 173 of the Act, with at least seven days’ notice to directors. The agenda should include:

• Approving the proposal to issue preference shares, including type, number, face value, dividend rate, redemption terms, and conversion details (if applicable).
• Determining the issue price, supported by a valuation report from a registered valuer if it’s a preferential issue under Rule 13.
• Authorizing the convening of a general meeting for shareholder approval.
• Appointing professionals like valuers or bankers if required.
• Minutes of the meeting must be recorded.

3. Obtain Shareholder Approval via Special Resolution

Issue a notice for the general meeting (EGM or Annual General Meeting) under Section 101, with at least 21 days’ notice. The special resolution must detail:

• Priority in dividends and capital repayment over equity shares.
• Participation rights in surplus funds or assets on winding-up.
• Dividend basis (cumulative/non-cumulative).
• Conversion terms into equity shares.
• Voting rights (typically limited to matters affecting preference shareholders).
• Redemption specifics, including tenure (not exceeding 20/30 years) and modes.
• File the special resolution in e-Form MGT-14 with the ROC within 30 days, including the explanatory statement.

An explanatory statement under Section 102 must accompany the notice, covering:

• Issue size and nominal value.
• Share nature (e.g., convertible).
• Objectives and manner of issue.
• Pricing basis and terms.
• Redemption details.
• Current shareholding pattern and potential dilution on conversion.

4. Valuation and Offer Letter (for Preferential Allotment)

For preferential issues, obtain a valuation report from a registered valuer to determine the fair price. Prepare an offer letter in Form PAS-4, detailing terms, and circulate it to proposed allottees. Maintain records of offers under Rule 14. Receive application money via banking channels into a separate bank account, as per Section 42.

5. Allotment of Shares

Allot shares within 60 days of receiving application money, either by the board or an authorized committee. Ensure minimum subscription and other private placement norms are met. Update the Register of Members under Section 88 with preference shareholder details.

6. File Return of Allotment

Submit Form PAS-3 with the ROC within 15 days (for private placement) or 30 days of allotment, attaching the valuation report, special resolution, and list of allottees.

7. Issue Share Certificates

Issue certificates in Form SH-1 within two months of allotment, duly stamped and signed by authorized signatories.

8. Post-Issuance Compliances

• Maintain records and update statutory registers.
• Plan for redemption: Ensure funds from profits or new issues; create Capital Redemption Reserve if needed.
• If unable to redeem, seek National Company Law Tribunal (NCLT) approval to issue new redeemable shares with 75% holder consent.