As per sec 42(ii) of the Companies Act, 2013 preference shares means part of share capital where preferential share holder has preference over payment of dividend. In case of winding up of company, preference shareholders has right over payment of dividend. Companies (Share Capital and Debenture) Rules, 2014 deals with procedure for issue of Preference Shares.
Section 55- Issue and Redemption of Preference Shares, Rule-9-Companies (Share Capital and Debentures) Rules, 2014.
Preference shares can be classified into 8 types
Cumulative preference shares means dividends are carried forward and paid only at the end of specified period.
It is opposite of Cumulative Preference Shares. Dividends are paid out of profit every year
Such preference shares can be claimed after a fixed period or after giving due notice.
Such shares cannot be redeemed during the lifetime of the company, but can only be obtained at the time of winding up (liquidation) of assets.
The shares can be converted into equity shares after a time period, or as per the conditions laid down in the terms.
Non-convertible preference shares cannot be, at any time, converted into equity shares.
Such shares have the right to participate in any additional profits, after paying the equity shareholders. The surplus of profit is apart from the fixed dividend paid up for preference shares.
Non-participating preference shares do not possess any right to participate in surplus profits or any surplus gained at the time of liquidation of the company.
Methods to issue Preference Share
Following are some pre-requisite conditions for issue of preference shares
Before issue of preference shares, check whether Articles of Association permits, if not then AOA needs to be amended.
An offer can be made under a Private Placement Offer Letter to not more than 200 people in a financial year. Limit of 200 people excludes Qualified Institutional Buyers and Employees.
As per rule 13(2)(d) Companies (Share Capital and Debentures) Rules, 2014 Company has to mention names of proposed allottees and percentage capital to be held by them.
The Company shall prepare the offer letter in form PAS-4 and maintain the complete record of PAS in form PAS-5.
The entire preferential allotment process within 12 months from the date of passing of special resolution. If the allotment is not completed within 12 months, another resolution needs to be passed to such effect
The company making an offer or invitation under this section shall allot its securities within 60 days from the date of receipt of the application money. Whichever is earlier.
Price of shares to be issued on preferential basis shall not be less than the price as determined by the Registered Valuer (Chartered Accountant) in valuation report.
The value of the Offer per person shall not be less than INR 20,000 of ‘face value’ of securities. The shareholder can accept less value of shares.
The offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within 30 days of recording the names of such persons at extra ordinary general meeting.
No offer shall be made unless allotments with respect to offer or invitation made earlier completed.
A separate bank needs to be opened by the Company. The money so received for allotment shall be kept in a separate bank account of the company and utilized only for allotment (or repayment).
|Step 1: Issue notice of board meeting||The first step for issue of preferential allotment is issue of notice atleast 7 days before meeting to all directors of the Company.|
|Step 2: Conduct of Board||Conduct board meeting on decided date, time and place and pass resolutions as follows-
|Step 3: Issue notice of Extra Ordinary General Meeting (EOGM)||The next step is to issue notice of EOGM atleast 21 days before meeting|
|Step 4 : Conduct of EOGM||Pass a special resolution for Preferential allotment of Shares along with following information
|Step 5: Despatch of Offer letter in form PAS-4||Issue offer letter within 30 days of General Meeting/recording the name of such person.
Offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.
Offer Letter despatched either in writing or electronic mode.
|Step 6: Filling of form SH-7 and MGT-14||File SH-7 with Registrar within 30 days of passing of Special Resolution for Reclassification
File MGT-14 with Registrar within 30 days of passing of Special Resolution.
|Step 7: Open Separate Bank Account||A separate bank needs to be opened by the Company. The money so received for allotment shall be kept in a separate bank account of the company and utilized only for allotment (or repayment).|
|Step 8: Call Board Meeting||A board meeting needs to be called after receiving allotment money.|
|Step 9: Conduct of Board Meeting||Hold board meeting along with-
|Step 10: File Form PAS-3||Form PAS-3 needs to be filed with ROC within 15 days from the date of allotment.
|Step 11: Issue of Share Certificates||Share certificates in form SH-1 shall be issued within 2 months from the date of allotment of shares.|