Permission to issue preference shares

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GD (Querist)
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21 February 2013 Hello there...

A company I am vested in is asking to vote on a resolution to issue cumulative redeemable preference shares in one or more tranches.

Following are not mentioned in the proposed resolution:
1. Whom the shares will be allotted - whether the issue will be private only or will be offered to minority shareholders also.
2.Fixed cumulative dividend and period/redemption date to be decided by the Board of Directors/Committee of Directors at the time of issue.

The only rationale given for the issue is: "it is believed issue of pref shares will help optimize the capital structure of the Company and improve the returns for the equity shareholders".

Arent risks abound here of invisible corporate scams related to preferential shares like - selling common stock at high price and comfortably vesting at a high fixed dividend rate and flexible timeframe in pref shares later if issued privately?

What is the good thing about Preferential Shares as against issuing Common Stock?

~GD

CA Himanshu Kansal

CA Himanshu Kansal (Expert)
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21 February 2013 In the perspective of a shareholder, i will be more concerned with period of pay back, and i will be ready to invest where there is a surety of pay back say after 5 years or 7 years or more and further a fixed rate of return on investment. Therefore if a company wants to finance its operations in the small time frame then the Preference issue is a good option to early finance the operations.

But from the company point of view such issue is more costlier as comparison to equity issue, however in case of listed company such financing will help the company to build an edge over the returns to the equity shareholders.

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