A Comprehensive Analysis of Redeemable Preference Shares

Redeemable preference shares are the shares that can be redeemed after a certain period, according to the Company Act of 2013. (twenty years to be exact). Preference shares that can be redeemed are a type of preference share. They are distributed to shareholders and then redeemed by the corporation. you will find various blogs and articles on the web explaining the web, but in this blog, we are going to take a deep dive into the ocean of Preference shares.

What are Preference Shares?

Preference The Companies Act of 2013 does not define shares in the Definition section. However, it is defined as follows in Section 43 of the Companies Act, 2013:

The word Preference Shares is defined in Explanation (ii) to Section 43 of the Companies Act, 2013 (‘the Act’).

When referring to a corporation limited by shares, “preference share capital” refers to the portion of the company’s issued share capital that contains or would carry a preferential right concerning —

a) the payment of a dividend, either as a defined sum or an amount computed at a predetermined rate, which may be tax-free or taxable; and

(b) repayment of the amount of the share capital paid-up or deemed to have been paid up, whether or not there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company, in the event of a winding-up or repayment of capital;

Furthermore, a class of shares is assumed to be preference shares if it contains either of the following criteria, according to Explanation (iii) to section 43.

a) In addition to the preferential right to dividends, shareholders have the option of participating wholly or partially in the capital that does not receive preferential treatment.

b) In addition to receiving preferred repayment of share capital in the event of insolvency, shareholders are entitled to participate in the company’s excess capital, either totally or partially.

Types of Preference Shares

Under preference shares, there are essentially eight categories of shares. Any of the eight forms of equity are payable before other types of shares in the event of a company’s dissolution. Let’s understand all types of Preference shares one by one.

Cumulative

Cumulative Preference Shares, as the name implies, allow shareholders to receive dividends that may have been neglected in the past. Dividends are a form of compensation paid by a firm to its shareholders. The corporation, on the other hand, is not liable to do so. For some time, the corporation may pay a lower or no dividend, and when it does, shareholders must get all dividends in arrears.

Non-cumulative

Non-cumulative preference shares allow a shareholder to receive a fixed dividend from the company’s net earnings each year. However, if the corporation fails to pay a dividend on such a share in any given year, future payments will be unavailable to shareholders.

Redeemable

Redeemable preference shares are shares that a company has promised to redeem at some point in the future. Subject to the company’s AOA or any shareholder’s agreement, the shareholder will still be able to sell or transfer the stock.

Non-redeemable

Non-redeemable preference shares are those that cannot be redeemed during the life of the corporation. However, this is not the case when an asset is liquidated or a firm is wound up.

Participating

The participation share entitles its owner to a share of the surplus profit made by the company after it has been distributed to other shareholders. As a result, such shareholders receive a fixed dividend and a share of the company’s additional earnings. The majority of people invest in stocks of companies where the likelihood of profit appears to be substantial.

The given elements are essentially enshrined in a preference share agreement.

• When a company makes a profit, the participating preference shareholders will receive a portion of that profit as well as a pre-determined dividend.
• In the event of a company’s liquidation, shareholders will be entitled to a portion of the net proceeds.
• Such shareholders may have voting rights over certain decisions such as the sale of the company or critical assets.
• The shares may be cumulative, implying that shareholders will be given priority over equity owners in receiving unpaid dividends.

Non-participating

Non-participating is the inverse of a former share, as the name implies. During the liquidation or winding up, its holders will not receive a share of the company’s additional earnings. Only pre-determined dividends would be available to the owner of such shares.

Convertible

As the name implies, a convertible share can be converted into equity shares after a set period or according to the conditions of the agreement.

Non-convertible

Non-convertible preference shares are those that are redeemable under the Companies Act, 1956, and do not contain shares that can be exchanged for the issuer’s equity shares at a later period.

Tenure of Preference Shares

i) A Company Limited by Shares may issue preference shares that are redeemable within twenty years after the date of issue if its articles allow it.

ii) A corporation may issue preference shares for a period of more than twenty years, but up to thirty years for infrastructure projects, subject to the redemption of 10% of shares on an annual basis at the discretion of such preferential shareholders beginning in the 21st year or earlier.

Methods of issue of Preference Shares

• Rights Issue under Section 62(1)(a) only to existing Equity Shareholders;
• ESOP under Section 62(1)(b) specifically to employees under a Scheme or Preferential Allotment under Section 62(1)© of the Companies Act, 2013 to any person subject to adherence to Rule 13 of the Companies (Share Capital and Debenture) Rule, 2014;
• Private Placement of Shares under Section 42 read with the Companies (Share Capital and Debenture) Rule, 2014.

Redemption of preference shares

It’s the process of repaying a debt, usually at the agreed-upon sum. These shares are granted to shareholders on the condition that they will be repaid the money they invested in the company at some point in the future.

The maturity date, also known as the redemption date, determines when repayment occurs and is usually specified in the agreement.

Conditions for redemption

• Preference shares that have been fully paid up can only be redeemed.
• Preference shares can only be redeemed with earnings available for distribution to shareholders or proceeds from a new issue of preference shares. Shares issued only to facilitate the redemption of preference shares
• When redeemable preference shares are redeemed from profits available for distribution, a sum equal to the nominal value of the shares redeemed is transferred to the Capital Redemption Reserve.
• The CRR is recognized as the company’s paid-up share capital for all purposes and can also be used to issue bonus shares.
• In the case of a class of firms that may be prescribed under Section 133 of the Companies Act, 2013 and whose financial statements meet accounting standards.

(i) The premium payable on redemption will be paid from the company’s profits before the shares are redeemed.

(ii) Any premium payable on redemption of any preference shares issued on or before the effective date of the 2013 Act shall be paid out of the company’s profits or the securities premium account before such shares are redeemed.

• If the firm does not belong under the above-mentioned class of companies, the premium, if any, payable on redemption shall be paid out of the company’s profits or from the company’s securities premium account before the shares are redeemed.

Inability to redeem the redeemable preference shares

• If a company is unable to redeem any preference shares or pay any dividends on such shares following the terms of the issue (such shares are referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths of the value of such preference shares and the approval of the Tribunal on a petition filed by it in this regard, issue furlong preference shares.
• The Tribunal will order the firm to redeem the preference shares owned by shareholders who are opposed to the arrangement as soon as possible.
• The issuance of preference shares to redeem unredeemed preference shares (together with the dividend) is not regarded as a growth in the company’s share capital.

Process about the redemption of preference shares

• Organize a general assembly meeting. Because advance notice is required in this case, make sure to notify directors and stakeholders about the meeting. It’s worth mentioning that notice should be given seven days in advance of the meeting.
• The resolution must be passed by the general body meeting to redeem the preference share. Furthermore, the members must define and agree on regulations for the specified shares. The meeting must resolve issues such as the kind of preference shares and the number of shares. Finally, the member should pass a redemption letter to serve the aforementioned objective.
• Following the passage of the resolution, the application, designated as SH-7, must be lodged with the Registrar within 30 days. The minutes of the meeting must be included in the SH-7, as well as an original copy of the resolution signed by the board members.

Conclusion

Preference shares that can be redeemed are a type of preference share. They are distributed to shareholders and then redeemed by the corporation. They are of various types and several conditions are included while the allotment of preference shares. You will find various misleading pieces of information on the web. But we hope that this article has helped you to increase your knowledge and clear out the misunderstandings that you had to date.