PROCEDURE FOR ISSUE OF PREFRENCE SHARES

PROCEDURE FOR ISSUE OF PREFRENCE SHARES

PREFRENCE SHARES

Definition: Preference shares allow an investor to own a stake at 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.

Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company’s assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock:

  1.  Cumulative Preferred stock,
  2.  Non-Cumulative Preferred stock,

III.         Participating Preferred stock,

  1. Convertible Preferred Stockalso called preferred stock.

Preference shares are considered as quasi-debt instruments since they combine the features of equity as well as debt. On one side, they carry a preferential right over the ordinary shares to receive dividend at a fixed rate and on the other, they carry an equity risk of not being secured, except to the preferential right of repayment in case of winding-up of the company. Preference shares have proved beneficial for investors, since such quasi-debt instrument provides protection to their investment by possessing voting rights on matters affecting their interest, more so with the fixed rate of dividend. For the promoters, issue of preference shares to investors ensures access to capital without a need to provide any security, with a continued control.

Advantages of preference shares:The main advantage of preference shares over equity shares is that

ü  They enjoy a preferential right to dividend and

ü  Repayment of capital in case of winding-up of the company.

Disadvantages of preference shares:

The main drawback of preference shares is that they carry limited voting rights:

Generally, an equity share confers on its holder a right to vote on all resolutions that require shareholder approval under the Act, any other law, or the articles of association of the company. Equity shareholders, among others, enjoy the right to appoint and remove directors and auditors, and approve the company’s accounts.

Therefore, the control of a company is in the hands of its equity shareholders.

As distinguished from an equity share, a preference share carries voting rights only with respect to matters which directly affect the rights of the preference shareholders.Due to these limitations on voting rights, a preference shareholder does not have much control over the company. However, a preference shareholder may acquire voting rights on par with an equity shareholder if the dividend on preference shares is in arrears:

Procedure for Issue of Preference share is given under Section-62 of Companies Act, 2013. Issue of share can be in three modes:

  1. Right Issue of Shares [Section- 62(1) (a)]
  2. Preferential Allotment of Shares. [Section- 62(3) (c) and Section-42]
  3. Private Placement of Shares. [Section-42)

In my earlier articles I already discussed in detail the procedure for issue of shares by Right Issue and Private Placement. Same Procedure will be applicable on issue of Preference Shares.

Checks for issue of Preference Shares:

  1. Check whether nominal capital of company divides into Equity Share Capital and Preference Share Capital.
  2. Check whether there is Provision in Article of Association of company regarding issue of Preference shares.
  3. 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.
  4. At the time of issue of Preference shares no subsisting default in payment of dividend due on any preference share. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014.

Conditions for issue of Preference Shares:

  1. The Issue of Preference Shares has been authorized by Passing of Special Resolution in the General Meeting of company.
  2. Fulfill all the requirement mention in the checks above.
  3. Company requiresmaintaining a register under Section- 88 (Register of Member) shall contain the particulars in respect of such preference share holder(s).
  4. Things to be mentioned in the Special Resolution passed for the purpose of Issue of Preference Shares.
  5. a) The priority with respect to payment of dividend or repayment of capital vis-à-vis equity shares.
  6. b) The participation in the surplus fund.
  7. c) The participation in surplus assets and profit, on winding-up.
  8. d) The payment of dividend on cumulative or non-cumulative basis.
  9. e) The conversion of preference shares into equity shares.
  10. f) The voting rights;
  11. g) The redemption of preference shares.

Important Condition on Preference Shares:

  1.  As per section 55 of the Act, a company can issue only redeemable preference shares i.e. a company is not allowed to issue irredeemable preference shares.
  2. It is mandatory for every company issuing preference shares to redeem it within a period of 20 years from the date of issue.
  3. A company may issue preference shares for a period exceeding 20 (Twenty) years forinfrastructure projects. Subject to Redemption of a Minimum 10% of such preference shares per year from the 21 (twenty first) year onward or earlier, on proportionate basis, at the option of preference share holder. (As per rule- 10 of The Companies (Share Capital and Debentures) Rules, 2014.

IIssuance of preference shares, Explanatory Statement should mention following information:(Rule 9 of Companies (Share Capital and Debentures) Rules, 2014)

  1. a)     Size of the issue and number of preference shares to be issued and nominal value of each share;
  1. b) Nature of such shares i.e. cumulative or non – cumulative, participating or non – participating, convertible or non – convertible.
  1. c) Objectives of the issue;
  2. d)     Manner of issue of shares;
  3. e) Price at which such shares are proposed to be issued;
  1. f) Basis on which the price has been arrived at;
  2. g) Terms of issue, including terms and rate of dividend on each share, etc.;
  1. h) Terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion;
  1. i) Manner and modes of redemption;
  2. j) Current shareholding pattern of the company;

Expected dilution in equity share capital upon conversion of preference shares.

STEP POCEDURE ISSUE OF PREFERENCE SHARES

STEP-1

Call Meeting of Board Director:

ü   Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.

ü   Attach Agenda of Board Meeting along with Notice.

STEP-1I

Hold the Board Meeting:

ü  Check the quorum of Board Meeting.

ü  Approve right issue including “letter of offer”, which shall include right of renunciation also. (At Board Meeting).

ü  Pass Board Resolution for approval of offer letter.

ü   Issue Notice of General Meeting. (As per Section- 101(1) issue notice of General Meeting at least 21 days before General meeting).

ü  Notice shall specify place, date, day and the hour of the meeting and shall contain a statement on the business to be transacted in the meeting. [Section-101(2)]

ü  Authorize a director of company to issue notice of General Meeting.

ü  Issue Notice of General Meeting- Directors, Shareholders, Auditors.

STEP-1II

Hold Extra Ordinary general Meeting:

ü  Check the quorum of Meeting.(Section-103).

ü  Present Offer Letter before the members of the meeting.

ü  Pass Special Resolution for Private Placement of Shares. [For every such offer separate Special Resolution is required].

ü Check whether auditor is present, if not. Then Leave of absence is Granted or Not. (As per Section- 146).

STEP-IV

Circulate Letter of Offer:

ü  (Through registered post or speed post or through electronic mode to all the existing share -holders at least three days before the opening of the issue.)

ü  Offer shall be open for period Not less than 15 (fifteen) days or not more then 30 (Thirty) days.

STEP-V

File Form with Registrar:

ü  File MGT-14 with Registrar within 30 days of passing of Special Resolution.

Attachments:

ü  Notice of General Meeting along with Explanatory Statement.

ü  Certified True copy of Special Resolution.

ü  Minutes of General Meeting

STEP-VI

Receive acceptance/renunciations/rejection of rights from members to whom offer has beensent & also from persons in whose favour right renounced.

STEP-VII

Call Board Meeting after receiving of allotment of money.

ü  Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting. [Section-173(3)]

ü   Attach Agenda of Board Meeting along with Notice.

STEP-VIII

Hold the Board Meeting:

ü  Check the quorum of Board Meeting.

ü  Approve allotment by passing of Board Resolution. And present list of allottees before the Board

ü  Pass Board Resolution for allotment of shares (within 60 days of receiving of money).

ü  Pass Resolution for issue of Share Certificate in same Meeting.

ü  Authorize to two directors and a authorize person to sign share certificate.

ü  Authorize a director to file E-form PAS 3(Return of Allotment) to ROC within 30 days ofpassing of Resolution.]

STEP-IX

File form with ROC:{As per Section 39(4) and rule 12 of Companies (Prospectus and allotment of Securitas) Rules, 2014.

ü  File PAS-3 with Registrar of Company.

ATTACHMENTS:

Ø  List of Allottes.

Ø  Board Resolution for allotment of Shares.

STEP-XI

Issue Share Certificate:

ü  Issue Share Certificate in Form- SH-1 (As per Section-56 with in 2 (two) months from the date of allotment of shares.

NoteIMPORTANT POINT TO BE KEPT IN MIND WHILE ALLOTMENT OF PREFERNECE SHARES
Ø  Make Allotment within 60 days of receiving of Application Money; otherwise it will treat as deposits as per deposits rules.
Ø  Issue Share Certificate under form-SH-1
Ø  Make Entry of allotment of Preference Share under Register of Member maintained in Form No. MGT-1. {As per Section-88 and the Companies (Management and administration) Rules, 2014.

 (Author – CS DiveshGoyal)

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