Preference shares

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Diana (Querist)
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26 November 2008 Can a newly incorporated private company issue only preference shares(no equity shares). I understand there would be practical difficulties in complying Companies Act with regards to voting rights and quorum etc. However legally whether a new pvt co. can issue preference shares

CS Yogesh Sachdeva

CS Yogesh Sachdeva (Expert)
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26 November 2008 Section 85 does not apply to Private Companies. They may issue any kind of shares.

Secondly, Section 85 of the Companies Act provides that there may be two kinds of shares :-
1. Preference shares
2. Equity shares

Unless there is another already existing class of shares over which the preference shares shall be "preferred" (whether in terms of repayment or dividend or otherwise), the shares cannot be called prefernce shares. Therefore, there shoul be equity shares before the preference shares are issued. in other words : Where there is only one class of shares, there is no question of preferential treatment of one class over another.

You may refer to Bihar State Financial Corporation V. CIT, Bihar (1976) in this regard.

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