Conversion of equity shares into preference shares

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Rajesh Tripathi (Querist)
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11 January 2012 Hi- I have a specific query that whether any shareholder of a Private Company request to the Board to conver the equity into preference shares which carry fixed rate of dividend.

Now whether it is possible, if yes what should be procedure? if no, which provision restrict it?

Early responce will be higly appreciated.

CS Pawan Kumar Baid

CS Pawan Kumar Baid (Expert)
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11 January 2012 Equity is permanent capital, you can reduce it by buy-back and then reissue as preference, but it cannot be converted in preference.

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Rajesh Tripathi

Rajesh Tripathi (Querist)
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11 January 2012 Which provisions of Companies Act prohibits such restrictions. If converted what would be the consequence?

CS Pawan Kumar Baid

CS Pawan Kumar Baid (Expert)
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12 January 2012 It will amount to reduction of capital hence you have to follow provisions of Sec 100. See Sec 77 also.

Jiten Gupta

Jiten Gupta (Expert)
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12 January 2012 My views on your question are as follows:

1. The equity paid up capital is the base and eternal capital, once issued, can not be taken back unless and until one follows the mechanism of "Reduction of Capital" for partial withdrwal and "Winding up" for withdrwal of leftover.

2. Contrary to the above, Preference shares can be issued for a maximum period of 20 years only (Section 80(5A)) and afterwards have to be compulsorily reedemed. Thus, preference shares are not eternal shares.

3. If we try to issue equity shares convertaible into preference shares, say after 20 years, they will be reedemed and a situation may come that, in 21st year, there won't be any capital avaialble with company, which is again hit by provisions of Section 45. (i.e. no capital = no members).

4. In view of above, issue of convertiable PS into ES looks odd. However, in the senario 3, if the company could issue another class of CPS before 20 years (say in the 18th or 19th year), the technical flaw may be overcome, but how the situation would be viewed by the creditors etc., the financial implications and going cocern concept etc., needs to be checked.

Other views are welcome

Jiten Gupta

Jiten Gupta (Expert)
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