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Issue of preference share for an unlisted public company (Others)

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This query is : Resolved


( Author )
27 September 2012

Dear Concerns,

Please tell me how many type of Preference shares can be issued? How their pricing to be done? Is there any price band need to be fixed? Also tell me the different rules to be followed for the same for both convertible issue and Non-Convertible issues?

Many thanks in Advance for your necessary information in this regard.


Ajay Mishra

( Expert )
27 September 2012

Hi

A company limited by shares may, if authorised by its Articles, issue preference shares. This means that a public company or a private company may issue preference shares only if its Articles authorise to do so.

Basic requirements of the preference shares:

To qualify the preference share, it should fulfill both the following requirements namely:—
(a) that it carries or will carry a preferential right to be paid dividend of a fixed amount or at a fixed rate; and
(b) that it carries or will carry a preferential right to repayment of capital paid up where or not there is any other preferential right.
In view of the above inclusion of a right to get dividend, whether cumulative or non-cumulative is an inseparable element of preference shares and right to the repayment of capital on winding up.
Dividends can be paid to cumulative preference shareholders in winding up whilst assets of the company are being distributed, and they rank in priority to other shareholders both as regards dividend and capital. [Bombay Chlorine Products Ltd., In re (1965) 35 Comp Cas 282 (Bom)].
Where cumulative preference shareholders are entitled to share in surplus of assets on winding up, they are not entitled to preference for arrears of dividend unless there is specific provision for priority to such arrears.
Where the preference shareholders are entitled to participate in surplus assets on winding up, surplus assets will include undistributed profits on the date of liquidation. [Dimbula Valley (Ceylon) Tea Co. Ltd. v Laurie (1961) 31 Comp Cas 655 (Ch. D)].


Ajay Mishra

( Expert )
27 September 2012


Types of preference shares:

Preference shares may be classified into the various categories and may carry preferential rights as per the provisions of the articles of the company.

1. Cumulative preference shares.—In the case of cumulative preference shares, the shareholders are entitled to receive the dividend for a year which could not be paid due to losses or inadequate profits in the subsequent year(s) whenever there are sufficient profit.

2. Non-cumulative preference shares.—If dividend on non-cumulative preference shares is not paid in any year on account of losses or inadequate profits or otherwise, then the right to dividend for that year is lost and cannot be carried over in subsequent years.

3. Participating preference shares.—These types of shares are entitled to participate in the surplus profit/dividend besides, entitlement to fixed dividend or dividend at fixed rate.

4. Non-participating preference shares.—These types of shares are entitled to receive fixed amount of dividend or dividend at fixed rate but do not have right to participate in surplus profits.

5. Redeemable preference shares.—Section 80(1) provides that a company limited by shares may, if so authorised by its Articles, issue preference shares which are to be redeemed at the option of the company.

6. Irredeemable preference shares.—Section 80(5A) provides that a company shall not issue preference shares which are either irredeemable or redeemable after the expiry of a period of 20 years from the date of its issue.

7. Convertible preference shares.—These shares may be converted into equity shares as per the terms and conditions of their issue.

8. Non-convertible preference shares.—These shares are not convertible into equity shares but have the preferential rights to payment of capital in the event of liquidation of the company or otherwise.


Ajay Mishra

( Expert )
27 September 2012

Requirement for redemption of shares

Section 80(1) provides conditions for redemption of preference share which has to be complied with by a company (Appendix 4 & 5):—
(1) The preference shares shall be redeemed out of profits of the company which would otherwise be available for distribution as dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption.
(2) Only fully paid preference shares shall be redeemed.
(3) The premium, if any, payable on redemption shall be provided out of profits or out of the company's security premium account, before the shares are redeemed.
(4) Where any preference shares are redeemed out of profits, a sum equivalent to the nominal value of the shares redeemed shall be transferred to the capital redemption reserve fund.


Ajay Mishra

( Expert )
27 September 2012

Voting rights of preference shareholders:


Section 87(2)(a) provides that every member of a company limited by shares and holding any preference share capital therein shall have a right to vote in respect of such share capital, on every resolutions placed before the company which directly affect the rights attached to his preference shares.
It is only if the dividend due on cumulative preference shares remains unpaid for a aggregate period of not less than two years preceding the date of commencement of meeting that a cumulative preference shareholder gets the right to vote on all resolutions. [Hotel Queen Road (P) Ltd. v Hill Crest Reality Sdn. Bhd. (2006) 68 SCL 197 (Del)].
If voting is done by way of poll then preference shareholders will have right to vote in proportion to their shares of the total paid up share capital of the company.
The voting right shall be in the same proportion as the capital paid up, in respect of the preference shares bears of the total paid up equity capital of the company.
Explanation of section 87(2)(a) provides that any resolution for winding up the company or for repayment or reduction of its share capital shall be deemed directly to affect the rights attached to preference shares within the meaning of this clause.
However, as per section 90, provisions of section 85 to 89 are not applicable to a private company as such.


Ajay Mishra

( Expert )
27 September 2012


Circumstances when preference shareholder can vote on all resolutions:

Every member of a company limited by share, holding any preference share capital therein shall, in respect of such capital shall be entitled to vote on every resolution placed before the company at any meeting, if the dividend due on such capital or any part of such dividend has remained unpaid for a specified period, which differs in respect of cumulative and non-cumulative preference shares as under:—
(a) Cumulative preference shares.—In the case of cumulative preference shares, if the dividend due on such shares in respect of an aggregate period of not less than two years proceeding the date of commencement of the meeting has remained unpaid. [Section 87(2)(b)(i)]
(b) Non-cumulative preference shares.—In the case of non-cumulative preference shares, if the dividend due on such capital or any part of such dividend has remained unpaid either in respect of a period of at least 2 years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of at least 3 years comprised in 6 years ending with the expiry of the financial year immediately preceding the date of commencement of the meeting. [Section 87(2)(b)(ii)]
(c) Any resolution for winding up the company or for repayment or reduction of capital shall also be deemed directly to affect the rights attached to the holders of the preference shares. When such resolutions are proposed in a meeting, the holders of preference shares shall have voting rights as in the case of holders of equity shares.


Ajay Mishra

( Expert )
27 September 2012

Period for redemption of preference shares:


Section 80(5A) of the Act provides that w.e.f. 1-3-1997, a company cannot issue preference shares which is irredeemable or redeemable after the expiry period of 20 years from the date of its issue.
If a company fails to comply with the provisions of section 80A, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 10,000 for every day during which such default continues and every officer of the company in default shall be punishable for a term which may extend to 3 years and shall also be liable to fine.


Ash Dalal

( Author )
27 September 2012

Thank You very much Ajay Mishra sir, for the swift reply.


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