Preference Shares Issue & Redemption of by A Private Limited Company

Statutory provisions regarding Issuance of preference shares: –

According to the provisions of Section 55 of the Companies Act 2013 a company limited by shares, if authorized by the Articles of Association [AOA] of the company may issue preference shares which are liable to be redeemed within 20 years from the date of their issue. No company shall be allowed to issue irredeemable preference shares.

Provided that the company engaged in setting up of infrastructure projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years for subject to the condition that 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.

The company may issue preference shares under the Act subject to the following conditions:-

  • The issue shall be authorized in Articles of Association [AOA] of the company.
  • The shares shall be issued after passing special resolution in the general meeting of the company.
  • 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.

Provided that the company issuing preference shares shall incorporate the following matters in the resolution passed at the general meeting:-

1. The priority in respect of payment of dividend as well as repayment of capital.

2. The participation in the surplus dividend.

3. The participation in surplus assets and profits on winding up which may remain after the entire capital has been paid.

4. Payment of dividend on cumulative or non-cumulative basis

5. The conversion of the preference shares into equity shares.

6. The voting rights.

7. The redemption of preference shares.

Under the following situation the preference shareholders have the right to vote,

  • On the resolutions placed before the company which directly affect the rights attached to his preference shares
  • any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital
  • where the dividend in respect of a class of preference shares has not been paid for a period of two years or more

The company may issue preference share after complying the above provisions under the following route:

1. Rights issue as per section 62[1]

2. Preferential allotment

3. Private placement under section 42.

It should be noted that at the time of issue of preference share please ensure that there is authorized capital for preference share and if there is no authorized capital for preference share then amend the capital clause of Memorandum Of Association.

Redemption of Preference shares

In light of the above, the preference shares shall be issued up to maximum of 20 years or 30 years in case company setting up infrastructure projects. It is clear that before expiry of the term the shares should be redeemed or converted into equity shares depending on the terms and conditions. The following are the important provisions regarding redemption of preference shares:-

  • The preference shares shall be redeemed out profits available for distribution of profits or out of the proceeds of fresh issue of shares made for the purpose of redemption.
  • No preference shall be redeemed unless they are fully paid up.
  • In case the preference shares are proposed to redeemed out of profits of the company then the equivalent amount should be transferred to a reserve called ‘Capital Redemption Reserve Account’.
  • The premium if any payable at the time of redemption of preference shares shall be paid out of the profit of the company or out of securities premium account.