All about preference shares under Companies Act 2013 By CS Gaurav Kumar


- With voting rights; or
- With differential rights as to dividend, voting or otherwise
- As per Explanation(ii) to section 42 of the Companies Act, 2013 (‘the Act’), the term preference shares mean and includes that part of the share capital the holders of which have a preferential right overpayment of dividend (fixed amount or rate) and repayment of share capital in the event of winding up of the company.
- Further, as per Explanation(iii) to section 42, when a certain class of shares has either of the following features, the same shall be deemed to be preference shares.
- Rights Issue of Equity Shares no approval of Members required. In view of Section 55 of the Companies Act, 2013 read with the Rule 9 of the Companies (Share Capital and Debenture) Rules, 2014 Members approval by way of Special Resolution required. We need to give effect of both the Sections.
- Preference shares allow an investor to own a stake in the issuing company with a condition that whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid.
- In addition to their preferential rights, the following rights are also attached to the preference share capital.
- Rights Issue under Section 62(1)(a) only to the existing Equity Shareholders; or
- ESOP Under Section 62(1)(b) specifically provides for the issue to the employees or
- Preferential Allotment under Section 62(1)(c) of the Companies Act, 2013 to any person including above can participate in this type of further issue subject to the adherence to Rule 13 of Companies (Share Capital and Debenture) Rule, 2014;
- Private Placement of Shares under section Section-42 read with the rule;
- Rights or Bonus Issue
- Private placement
- Section 55 of the Act read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 (‘Rules’) framed there under, inter alia, requires a company to obtain the prior approval of the Shareholders, by way of a Special Resolution for the issuance of preference shares;
- As per section 55 of the Act, a company can issue only redeemable preference shares ie a company is not allowed to issue irredeemable preference shares.
- Further, it is mandatory for every company issuing preference shares to redeem it within a period of 20 years from the date of issue.
- However, a company may issue preference shares with a redemption period of more than 20 years time provided that a certain percentage of such shares are redeemed annually at the option of the shareholders
- In order to issue securities by way of preference shares by private placement, the private company (‘the Company’) is required to circulate an offer letter to the selected group of people to whom the Company proposes to issue its shares.
- Conditions to be complied with before issuing preference shares:
- Whether nominal capital of company divides into Equity Share Capital and Preference Share Capital;
- whether there is Provision in Article of Association of the company regarding the issue of Preference shares;
- At the time of issue of Preference shares no subsisting default in the redemption of preference shares issued. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014;
- At the time of issue of Preference shares no subsisting default in the payment of dividend due on any preference share. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014;
- The voting rights;
- The redemption of preference shares.
- The priority with respect to the payment of dividend or repayment of capital vis-à-vis equity shares.
- The payment of dividend on the cumulative or non-cumulative basis.
- The conversion of preference shares into equity shares. The participation in the surplus fund.
- The participation in surplus assets and profit, on winding-up.
- the size of the issue and number of preference shares to be issued and the nominal value of each share;
- the nature of such shares i.e. cumulative or non-cumulative, participating or non-participating, convertible or non-convertible
- the objectives of the issue;
- the manner of the issue of shares;
- the price at which such shares are proposed to be issued;
- the basis on which the price has been arrived at;
- the terms of issue, including terms and rate of dividend on each share, etc.;
- the terms of redemption, including the tenure of redemption, redemption of shares at the premium and if the preference shares are convertible, the terms of conversion;
- the manner and modes of redemption;
- the current shareholding pattern of the company;
- the expected dilution in equity share capital upon conversion of preference shares.



Redemption of preference shares
- Fully paid-up preference shares can only be redeemed.
- Preference shares can be redeemed only out of the profits available for distribution to its shareholders or out of fresh proceeds of shares issued solely for the purpose of funding the redemption of the preference shares
- Where the redemption of preference shares are redeemed out of the profits available for distribution, a sum equivalent to the nominal amount of shares being redeemed shall be transferred to the Capital Redemption Reserve. The CRR shall be treated as the paid-up share capital of the company for all purposes and can also be utilized for bonus issue of shares
- Where the company is unable to redeem its preference shares or is unable to pay the dividend due on the preference shares, the company can replace issue such amount of preference shares as may be necessary in order to meet its obligation towards dividend payment and also the redemption of preference shares.
- On the issue of such further redeemable preference shares, the unredeemed preference Shares shall be deemed to have been redeemed.
- If a company is unable to redeem any preference shares or to pay dividend thereon, it may redeem such unredeemable preference shares by a further issue of redeemable preference shares equal to the amount due and dividend due thereon subject to–
- Redemption of preference shares by issuing new preference shares is subject to obtaining the consent of the preference shareholders (at least 75% of the shareholders) and also obtaining the approval of the Tribunal for such arrangement
- No distinction between CRPS and NCRPS i.e. 2 Vs 3 Yrs, in the matter of the Voting Rights in the event of non-payment of dividend
- The Tribunal shall order the company to immediately redeem the preference shares held by the shareholders dissenting to such arrangement. The issue of preference shares for purpose of redemption of unredeemed preference shares (along with the dividend) shall not be considered as an increase in the share capital of the company
- i) Out of the profits of the company which would otherwise available for dividend.
- ii) Out of the proceeds of a fresh issue of shares made for the purpose of such redemption.
- Partly paid up shares shall not be redeemed;
- A sum equal to the nominal amount of the shares to be redeemed is to be transferred to a reserve called “Capital Redemption Reserve;
- In case of such class of companies as may be prescribed and whose financial statements comply with the accounting standards.
- When a company is unable to redeem any preference shares, it can issue further redeemable preference shares equal to the amount due, including the dividend thereon subject to the following conditions;-
1. What is the redemption of preference shares?
2. Where should the information regarding redemption of preference share be mentioned?
3. What effect will the company financial structure have after redemption?
- It is a proper way of raising finance in a dull primary market.
- The preference shares may be redeemed when there is a surplus of capital and surplus funds cannot be utilized in the business for profitable use.
- The shares shall be redeemed out of profits of the company which would be available for dividend or out of proceeds of fresh issue of shares made for the purpose of redemption
- Preference shares can be redeemed only when they are fully paid up
- If any premium payable shall be out of profits of the company/ Out of company’s securities premium account, before the shares are to be redeemed
- Profits of the company usually refers to those profits available for dividends, be transferred to the reserve fund (Capital Redemption Reserve)
- Fresh issue of shares
- Capitalization of undistributed profits
- Combination of both
- When the liquidity position of the company is not satisfactory.
- Where the company is not able to declare dividend due to insufficient funds.
- Where the company has decided to have its share capital permanently over preference shares.
- No cash outflow of money
- New equity shares may be valued at premium
- No capital gain tax for shareholders
- Shareholders can retain their interest.
- There is a possibility of dilution of future earnings.
- Shareholders retain their equity interest.
15. What are the conditions to be satisfied under this method?
- No change in the share holding pattern of the company
- Future earnings is not diluted
- Surplus fund can be used
- They would be reduction in liquidity
- Capital gains Tax

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About Author
Gaurav Kumar
Qualification: Company Secretary
Company: Compliance Calendar LLP
Location: New Delhi
Member Since: 09 Dec 2017 | Total Articles Contributed: 22
About Author :
Gaurav Kumar is Law Graduate, Masters in Commerce and Fellow Member of ICSI. He is also a Member of the Corporate Affairs Committee of PHD Chamber of Commerce & Industry (PHDCCI).
Write a Comment
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08-03-2018 / 12:11:28 PMReply
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Sir,
Our Company issued Preference Share in the year 1985 and still not redeemed it.
Kindly suggest us the procedure for redemption.
Thanks
26-06-2018 / 04:01:49 PMReply -
Hi, can you please explain how company can convert its preference share capital to equity share capital as per companies act 196. need for old act.
08-01-2019 / 04:19:57 PMReply -
Good Article . Please note that the definition of preference share has been given in section 43 of the Companies Act 2013 and not section 42 ,which has been wrongly mentioned in the article.
15-07-2019 / 10:35:28 PMReply

I have a query "Pvt ltd company having two types of pref share i.e 4% and 10 % and now company decides to merge 4% into 10% pref shares will company do