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ISSUE-AND-REDEMPTION-OF-PREFERENCE-SHARES-A-COMPLETE-GUIDE
Issue and Redemption of Preference Shares: A Complete Guide
Introduction:
Preference shares are a class of shares that grant shareholders preferential rights over common shareholders, such as a fixed dividend and priority in the return of capital during winding up of a company. These shares play a significant role in the capital structure of a company, providing a way to raise funds while maintaining control. This article aims to provide a comprehensive guide to the issue and redemption of preference shares, covering various aspects such as the legal requirements, conditions, and accounting treatment.
| S.No | Questions | Answers |
|---|---|---|
| 1 | What are Preference Shares? | Preference share capital, in the context of a company limited by shares, refers to the portion of issued share capital that carries preferential rights concerning: (a) Payment of dividend at a fixed amount or at a fixed rate, either free of or subject to income tax; and (b) Repayment of capital in the event of winding up or repayment of capital, with or without a preferential right to any fixed premium, as specified in the company’s memorandum or articles. |
| 2 | What is Redemption? | Redemption of preference shares involves the repayment by the company of the obligation associated with the issued shares. |
| 3 | When can Preference Shares be issued? | A company limited by shares and authorized by its articles can: - Issue preference shares redeemable within a period not exceeding twenty years, or - Issue preference shares exceeding twenty years for infrastructure projects, subject to the redemption of a prescribed percentage of shares annually. This is in accordance with the Companies (Share Capital and Debentures) Rules, 2014. |
| 4 | Which type of Preference Share cannot be issued? | Irredeemable Preference Shares cannot be issued. |
| 5 | What are the conditions for issuing Preference Shares? | - Must be authorized by its articles. - Pass a special resolution. - Have no subsisting default in the redemption of preference shares or payment of dividend due on any preference shares. |
| 6 | What should be disclosed in the resolution? | (a) Priority regarding payment of dividend or repayment of capital relative to equity shares. (b) Participation in surplus funds. (c) Participation in surplus assets and profits, on winding-up. (d) Payment of dividend on a cumulative or non-cumulative basis. (e) Conversion of preference shares into equity shares. (f) Voting rights. (g) Redemption terms. |
| 7 | What should be disclosed in the Explanatory Statement? | (a) Size and number of preference shares, and nominal value per share. (b) Nature of shares—cumulative/non-cumulative, participating/non-participating, convertible/non-convertible. (c) Objectives of the issue. (d) Manner of issue. (e) Price of the shares. (f) Basis of pricing. (g) Terms of issue, including dividend rate. (h) Redemption terms, tenure, and conversion terms (if applicable). (i) Manner and modes of redemption. (j) Current shareholding pattern. (k) Expected dilution in equity capital upon conversion. |
| 8 | How can Preference Shares be redeemed? | (a) Redeemed out of the profits available for dividend or from proceeds of a fresh issue of shares. (b) Shares must be fully paid-up. (c) If redeemed from profits, a sum equal to the nominal value of shares should be transferred to a Capital Redemption Reserve Account. (d) Premium on redemption should be provided for out of profits or the company’s securities premium account. |
| 9 | When can Preference Shares be redeemed? | Preference shares can be redeemed based on the original terms or as varied with the approval of preference shareholders. They may be redeemed: (a) At a fixed time or on a specified event. (b) At the company’s option. (c) At the shareholder’s option. |
| 10 | What if a company is unable to redeem Preference Shares? | With the consent of three-fourths in value of such preference shareholders and Tribunal approval, the company can issue further redeemable preference shares equal to the amount due (including dividend). The unredeemed preference shares will then be deemed redeemed. |
| 11 | Conditions for Infrastructural Projects | Issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum 10% of such shares annually from the 21st year onwards or earlier, at the option of preference shareholders. |
| 12 | What are the accounting entries? | Issue of Shares: 1. New shares issued at par: Bank Account Dr. / To Share Capital Account2. New shares issued at premium: Bank Account Dr. / To Share Capital Account / To Securities Premium AccountRedemption of Shares: 3. Shares redeemed at par: Redeemable Preference Share Capital Account Dr. / To Preference Shareholders Account4. Shares redeemed at premium: Redeemable Preference Share Capital Account Dr. / Premium on Redemption Account Dr. / To Preference Shareholders Account5. Payment to preference shareholders: Preference Shareholders Account Dr. / To Bank AccountAdjustment Entries: 6. Transfer nominal value to CRR: General Reserve Account Dr. / Profit & Loss Account Dr. / To Capital Redemption Reserve Account |
Conclusion:
The issuance and redemption of preference shares are governed by specific rules under the Companies Act, 2013, and associated regulations. Companies must ensure compliance with the terms and conditions to maintain good corporate governance. Proper accounting and disclosure are essential to reflect the correct financial position. With this guide, stakeholders can gain a better understanding of the procedures involved, ensuring effective management of preference share capital.
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Article Compiled by:-
~From the desk of CS Sharath
(LegalMantra.net Team)
Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.