Process for Issue of Preference Shares as per Companies Act, 2013

Any public limited company is authorised to issue share capital, so as to raise funds for its business. The share capital can be of two types- equity and preference shares. Shareholders of the preference shares as the name suggests are preferred over equity shareholders. In this article we will discuss the process for issue of preference shares.

Meaning of Preference Shares

As per the provisions of Companies Act, 2013 the capital of a company can be of two kinds, equity share capital or preference share capital. The preference share capital means the a part of issued share capital that has preferential right with respect to-

• Payment of Dividend on a fixed rate , which can be free from income tax or not
• Repayment in case the company is being wind up. Preference shareholders will have a preferential right over and above the equity share holders in the event of winding up to the extent of paid-up capital on their shares.

Pre-Requisites for Preference Shares

For issue of preference shares following conditions must be satisfied

• Authorisation in MOA and AOA– In the capital clause of the company the nominal capital should be divided into equity and preference Shares. The Company should be authorised by its articles of association for issuing the preference shares.
• Tenure of Preference Shares-The preference shares proposed to be issued cannot be irredeemable. The preference shares can be issued for tenure of maximum 20 years, except in case of infrastructure projects. However in that case also, a particular percentage of the shares should be redeemed on annual basis.
• No Defaults in discharging rights of Preference shareholders- There should not be any defaults in payment of dividend or redemption of preference shares already issued.
• Register of Members- The Company needs to maintain a register of members with details of shareholders and their shareholding.

Process for Issue of Preference Shares

For starting new procedure the company first of all needs a board’s resolution followed by shareholders voting and passing the resolution. The issue of preference shares is no different. So, now we will discuss the process of issue of preference shares in detail with regards to both issue and allotment.

• First of all a prior notice of 7 days should be sent inviting the meeting of Board of Directors.
• In the Board Meeting, directors shall approve the letter of offer and authorise a director or a CS professional to send the notice for conducting shareholder’s meeting.
• The notice of general meeting will be sent and a special resolution will be passed for issue of preference shares. The contents of Explanatory Statement to Notice and Special Resolution should broadly be as follows:-
  
• The form MGT-14 should be filed with ROC and after that letter of offer should be circulated to persons that are being offered the shares in the issue.
• The reply as to acceptance and rejection will be received as per the time specified in the letter of offer.
• The Form GNL-2 will be file with ROC along with letter of offer and prospectus.

Allotment of Preference Shares

• The Board meeting should be called for allotment of shares and a resolution should be passed.
• The resolution should be passed both for allotment of shares and issuing of share certificates.
• Any two directors will be authorised for signing the certificates along with one other person.
• One Director will also be given the responsibility and authorisation to file form PAS-3 with ROC within 30 days of allotment.
• Share certificate will be issued to the allottees of the shares.

Voting Rights of Preference Shareholders

Preference shareholders of a company have right to vote while passing of resolutions that effect their rights. The right to vote has been explained as follows in Companies Act-

• The voting rights will be in proportion of their paid up share capital.
• The ratio of voting of equity shareholders and preference shareholders should be equal to the ratio between their respective paid up share capitals.
• If dividend on the preference shares is not paid for two years or more than the preference shareholders will have the right to vote on all resolutions placed before the company.

Conclusion

The process of issue of preference shares is based on the simple premise. First the board has to approve and afterwards shareholders have to vote and then compliances are to be completed with ROC. However, adhering to the timelines prescribed in law is utmost important. In case of preference shares the concurrence of equity shareholders become utmost important as they are taking one step back and giving a preferential right to preference shareholders. So, this was the discussion about process of issuing preference shares. Hope it was a useful read.