Issue of Preference Shares: Process and Conditions

Equity shares are the most common share type issued by any company. However, apart from equity shares, the companies are also allowed to issue preference shares as per the Companies Act, 2013. The type of share capital issued by the company alters the rights of shareholders and their preferential status. Let’s understand the meaning of preference share capital and how can companies issue preference shares in India.

What are Preference Shares?

Preference shares, as the name suggests, are the type of shares that give preference to its shareholders at the time of payment of dividend as well as liquidation of the company. As the equity shareholders are the real owners of the company, therefore they rank last for repayment when the company goes into liquidation. Preference shareholders are also considered as owners of the company. However, they rank above the equity shareholders for repayment when it comes to the liquidation of the companies or even payment of dividends. Another major difference between equity and preference shares is that the rate of return for preference shares is fixed whereas equity shareholders are distributed the profits of the company as per the declaration by the company.

Therefore, the preference shares provides preferential right to the shareholders in terms of the following:

• Payment of dividends to the shareholders
• Repayment of the amount of share capital during the winding up of the company

Types of Preference Shares

Following are the different types of preference shares that can be issued by the companies in India:

• Cumulative Preference Shares: These preference shares entitle the shareholders to receive their dividends in arrears, thus ensuring they get their dividend income. Therefore, if a company does not earn enough profits to release any dividends, the liability to pay dividends will still arise and unpaid dividends will accumulate. These dividends can be paid by the company in later years when the profits are earned.
• Non-Cumulative Preference Shares: These preference shares entitle the shareholders to dividends only when the company earns profits or declares dividends. Therefore, if the company records losses in a particular year, non-cumulative preference shareholders cannot claim a dividend.
• Redeemable Preference Shares: These preference shares are redeemed at a fixed rate on a fixed date as the company reserves the right to repurchase its own shares.
• Irredeemable Preference Shares: These shares cannot be redeemed till the time the company is in existence. Irredeemable preference shares act as perpetual liability of the company.
• Participating Preference Shares: These shares allow the shareholders to participate in the surplus profits of the company during liquidation. Therefore, these shareholders do not only receive fixed dividends but also a certain share of the profits of the company.
• Non-Participating Preference Shares: These shares do not entitle its shareholders to any right to the surplus profits of the company. Therefore, these shareholders are only entitled to the fixed dividends earned by the companies.
• Convertible Preference Shares: Convertible shares allow the shareholders to convert their preference shares to equity shares in the future after the expiry of a predetermined time period. The terms of conversion are already decided by the company at the time of issue of such preference shares.
• Non-Convertible Preference Shares: These shares do not carry any conversion right and therefore, cannot be converted into equity shares.

Difference Between Equity Shares and Preference Shares

Following are some of the key differences between the equity shares and preference shares:

Process of Issue of Preference Shares

Here’s the process of issuing preference shares in India:

• Board Meeting: The company needs to convene a board meeting and approve the resolution for the issue of preference shares of the company. A notice of at least 7 days shall be given to all the directors of the company before the date of the board meeting.
• General Meeting: The company then needs to hold the general meeting and present the resolution for the issue of preference shares. The special resolution shall be passed by the members authorizing the company to issue such shares. The company should also circulate the offer letter to the shareholders through registered post, speed post or electronic mode at least 3 days before the issue.
• File e-Form MGT-14: The company needs to file Form MGT-14 with the registrar along with the notice of the general meeting, a certified true copy of the resolution for the issue of shares of the company and minutes of the general meeting.
• File e-Form PAS-3: The company shall file e-Form PAS-3 with the registrar within a period of 30 days of passing the resolution for the allotment of shares. The form should be accompanied by the resolution and a list of allottees.
• Issue of Shares: The share certificates should be issued in Form SH-1 within a period of 2 months from the date of allotment of shares.

Conditions for Issue of Preference Shares

Following are some of the conditions for issuing preference shares in India:

• The issue of preference shares should be authorised by the shareholders by passing a special resolution in the general meeting of the company.
• You should ensure that the share capital of the company is bifurcated into equity and preference share capital.
• You shall review whether the articles of association authorise the issue of preference shares.
• The company needs to ensure that there are no subsisting defaults in relation to the payment of dividends due on any existing preference shares at the time of issue of proposed preference shares.
• The company also needs to ensure that there are no subsisting defaults in relation to the redemption of existing preference shares at the time of issue of proposed preference shares.

Information in Special Resolution

The special resolution presented in the general meeting of the shareholders shall consist of the following information:

• The rights of the preference shareholders in relation to repayment of capital and payment of dividends as compared to the equity shareholders.
• The share of the preference shareholders in the surplus funds during the course of winding up of the company.
• The conversion of the preference shares to equity shares.
• The payment of dividends, whether on a non-cumulative or cumulative basis.
• The right of the preference shareholders in the surplus profits and assets of the company.
• The redemption of preference shares.
• The voting rights of the preference shareholders.

Information in the Explanatory Statement

The company shall also circulate the explanatory statement along with the notice for the general meeting of the company. The explanatory statement shall include the following information:

• Type of preference shares issued or to be issued.
• The issue size and the number of preference shares to be issued along with the nominal value of each preference share.
• Manner of issue of preference shares.
• Objectives of issue of preference shares.
• Issue price of the shares.
• Calculation through which the price of the issue of shares was determined.
• The timeline of redemption of preference share and the premium at which the redemption is being planned.
• The conditions relating to the issue of preference shares.
• Whether the preference shares are convertible or not.
• Current shareholding of the company.
• Mode and manner of redemption of preference shares.
• The expected dilution of the equity shareholders consequent to the conversion of preference shares to equity shares.

Following are the complete details relating to the issue of preference shares. In case you need any assistance, feel free to contact the ASC Group.

Also, Check "Bonus Issue of Shares in India"

Leave a Reply

Your email address will not be published. Required fields are marked *

Post Comment