This article is written by Calista Chettiar, a Second-Year BA. LL.B. (Hons.) student from NMIMS, School of Law, Bangalore

INTRODUCTION:

Every corporation has two distinct kinds of shares: equity shares, also known as common stock, and preference shares, also known as preferred stock. As voting rights holders, stockholders are regarded as the legitimate owners of the company, although preference shareholders typically do not have the right to vote on all proposals. The group of preference shareholders who haven’t received dividends in relation to their preferred shares for two years or more, nevertheless, shall be entitled to vote on any matters brought before the firm. Priority is provided to preference shareholders for dividend payments and repayment in the event of a winding up. Every year, the rate of dividend on equity shares varies based on how much profit the corporation has accessible. Preference Shares, which are on the other hand, pay dividends at either a predetermined rate or a fixed amount.

SECTION 55 OF THE COMPANIES ACT OF 2013:

A joint stock company with limited liability may, at its prerogative, issue redeemable preference shares with a maximum expiration of 20 years from the date of issuance, provided that this is allowed under the articles of association of the firm.

The clauses of section 55 are as follows:

1. There are only fully paid shares that may be reclaimed.
2. Shares may be redeemed from revenues of new issuance, from divvied profits, or from either.
3. The token sum reclaimed from the divided profit when the stocks are redeemed out of it has to be transferred to the Capital Redemption Reserve Account.
4. New issues may be made at parity, surcharge, or discount.
5. Preference shares cannot be redeemed at a discount; they can only be redeemed at parity or at a surcharge.
6. The premium on redemption for preference shares that are redeemed at a premium must be deducted from the remaining funds in the Security Premium Account. If the Security Premium Account is unavailable or there is not enough money in the account to cover the premium when it is redeemed, then the remaining funds must be made up of divided profits. 

THE ISSUE AND REDEMPTION OF PREFERENCE SHARES:

There are two types of share issuance used to raise cash for businesses. Preference share capital and equity share capital are the two types. A company’s Articles of Organization give the board the authority to grant preference shares with restrictions. The company’s ability to grant preferences for a limit of twenty years is prohibited. The shares in question must be liquidated within that time frame.

In the event of a bankruptcy or winding up of the firm, the holders of preference shares have a priority right to dividend overpayments as well as the repayment of share capital. Only redeeming preference shares may be issued by an organization. Also, a corporation must issue shares with a 20-year redemption period.

When preferred shares are redeemed, the shareholders will receive their money at a specific time or on a specific date. Preference shares can only be reclaimed if they have been paid entirely. The gains that are accessible for distribution to the company’s shareholders or the new funds raised to cover the redemption of preference shares are used to redeem the shares.

PRE-CONDITION FOR THE ISSUE OF PREFERENCE SHARES:

A corporation is not permitted to grant irredeemable preferred stock, according to Section 55 of the Companies Act, 2013. The granted preference shares are subject to redemption within a time frame of no more than twenty years from the time of issuance. Nevertheless, a company that works on a piece of infrastructure may issue the preferred stock for a longer timeframe than 20 years but not longer than 30 years, provided that at least 10% of the preference shares are redeemed proportionally at the preference shareholders’ discretion beginning in the 21st year or later.

PROCEDURE FOR ISSUING PREFERENCES: 

1. Examine whether a preferential issuance condition is incorporated in the Articles of Association. If not, immediately modify the AOA.
2. Organize a Board Meeting for – If necessary, augment the budget for the Approved Preferences; the issuing of preferred shares being approved; organizing a General Assembly with shareholder consent.
3. Organize a General Assembly to accomplish the following tasks: 

If necessary, enhance the preferred budget allocation;

To approve a Special Resolution authorizing the issue of preferred shares.

1. Within 30 days following shareholder identification, submit form MGT-14, a duplicate of the special resolution, and an interpretation of the resolution to the Registrar of Companies.
2. Take advantage of bank channels to pay the preferred stock application fee.
3. Preferred shares must be assigned within 60 days of the application fee’s receipt. The board, any department, or any other authorized representative may make assignments.
4. Within 15 or 30 days from the date of distribution, respectively, submit Form PAS-3.
5. Prospective shareholders must be issued a Share Certificate (Form SH-1) within two months of the issuance date.

PREFERRED SHARES REDEMPTION:

The Company may only use its preferred shares under the following conditions:

1. for a specific timeframe or occasion; or
2. at any moment at the company’s discretion; or
3. at any moment at the shareholder’s discretion.

The usage of only well-known fully paid shares is permitted. The preferred shares can be used for the things listed below: 

Profits from the company that might be used to pay dividends or income from newly issued shares meant for redemption; new stock exchanges can be equally valued and preferred, or both.

PURPOSE OF ISSUING REDEEMABLE PREFERENCE SHARES:

A firm might issue redeemable preference shares for a number of different motives. These are a few of them:

1. It is a successful strategy for a business to raise capital or draw in investors in a drab main market.
2. If a company’s shares aren’t quoted on the stock exchange, it may be tough for it to raise money. Prospective customers might be skeptical about investing funds in the company’s stock in this situation due to the significant risk involved as the shares are difficult to sell. A more effective solution to this issue and one that will entice investors are redeemable preference shares.
3. Preference shares may only be redeemed by the firm when there is a capital surplus that cannot be utilized for the corporation’s lucrative business operations. In order to receive this benefit as well, corporations issue redeemable preference shares.

REDEMPTION OUT OF COMPANIES PROFITS:

It will be necessary to move a portion that corresponds to the maximum quantity of stocks that can be utilized if preference shares are postulated to be used for corporate earnings. This stockpile will be known as a Capital Redemption Reserve Account, and the regulations set forth in this Act pertaining share capital reduction implement as if the Capital Redemption Reserve Account were paid up. The corporation can utilize its capital redemption reserve account to make payments for unissued company shares that will be given to members of the organization as fully paid shares.

EXCEPTIONS TO THE REDEMPTION OF PREFERENTIAL SHARES:

When the Corporation is unable to redeem any preferred stock or dividend payments on such stocks in line with the conditions of issuance, those stocks are described as “preferred shares not purchased.” The Company has issued both these relevant preferred stocks equivalent to the necessary number, such as the existing funds, in reverence of unutilized preference shares. In the particular instance of those preferable buyable stocks, the unutilized preference shares will be considered to have been utilized with the assent of the 34th stockholders of the preferential shares as well as the authorization of the National Company Law Tribunal (NCLT) on its appeal. If a person does not consent to the issuing of popular useable shares, the NCLT will order that their popular shares be used immediately.

Preferential shares are the full arsenal a company needs to raise capital without sacrificing its governance or right to vote. It also provides preferred stockholders with consistent income, dividend value, and returns. I trust you comprehended the Companies Act 2013’s provisions on the issuance and redemption of preference shares.

REFERENCES:

https://taxguru.in/company-law/issue-redemption-preference-shares-2.html#:~:text=%3E%20ISSUE%20OF%20SHARE%20CERTIFICATE%3A%20The,shareholders%20as%20per%20section%2048.

https://taxguru.in/company-law/issue-redemption-preference-shares-companies-act-2013.html#Pre-conditions_for_issue_of_Preference_Shares

https://www.javatpoint.com/redemption-of-preference-shares

https://www.gc11.ac.in/uploads/elearning/Redumption%20of%20Preference%20Shares-1553331361.pdf

https://www.vedantu.com/commerce/issue-of-preference-shares