Corporate Law

Redemption of Preference Share under New Companies Act 2013

Background

Company limited by shares can’t issue any preference shares which are irredeemable.

A Company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed:

A Company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders.

Redemption of Preference Share under New Companies Act 2013
Redemption of Preference Share under New Companies Act 2013

Source of Redemption of Preference Shares:

  • Preference shares can be redeemed only out of the profits available for distribution to its shareholders as Dividend
  • Preference shares can be redeemed only out of Preference shares can be redeemed only fresh proceeds of shares issued solely for the purpose of funding the redemption of the preference shares

Condition for Redemption of Preference Shares:

  • Fully paid-up preference shares can only be redeemed.
  • A Company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act and the preference shares may be redeemed:-
  1. at a fixed time or on the happening of a particular event;
  2. any time at the company’s option; or
  3. any time at the shareholder’s option.

Capital Redemption Reserve:

  • Capital Redemption Reserve: Where the redemption of preference shares are redeemed out of the profits available for distribution, a sum equivalent to the nominal amount of shares being redeemed shall be transferred to the Capital Redemption Reserve.
  • Utilization of CRR: The CRR shall be treated as the paid up share capital of the company for all purposes and can also be utilized for bonus issue of shares.

Company is not in position to Redeem:

  • Where the company is unable to redeem its preference shares or is unable to pay the dividend due on the preference shares, the company can replace issue such amount of preference shares as may be necessary in order to meets its obligation towards dividend payment and also redemption of preference shares.
  • Redemption of preference shares by issuing new preference shares is subject to obtaining the consent of the preference shareholders (at least 75% of the shareholders) and also obtaining the approval of the Tribunal for such arrangement
  • The Tribunal shall order the company to immediately redeem the preference shares held by the shareholders dissenting to such arrangement. The issue of preference shares for purpose of redemption of unredeemed preference shares (along with the dividend) shall not be considered as an increase in the share capital of the company

PROCESS FOR REDEMPTION OF PREFERENCE SHARES:

Call Meeting of Board Director:

  • Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.
  • Attach Agenda of Board Meeting along with Notice.

Hold the Board Meeting:

  • Check the quorum of Board Meeting.
  • Pass Board Resolution for approval of Redemption of Preference Shares.
  • Issue Notice of General Meeting. (As per Section- 101(1) issue notice of General Meeting at least 21 days before General meeting).
  • Notice shall specify place, date, day and the hour of the meeting and shall contain a statement on the business to be transacted in the meeting. [Section-101(2)]
  • Authorize a director of company to issue notice of General Meeting.
  • Issue Notice of General Meeting- Directors, Shareholders, Auditors.

Hold Extra Ordinary general Meeting:

  • Check the quorum of Meeting. (Section-103).
  • Present Letter for redemption of Preference Shares before the members of the meeting.
  • Pass Special Resolution for redemption of Preference Shares.
  • Check whether auditor is present, if not. Then Leave of absence is Granted or Not. (As per Section- 146).

File Form with Registrar:

File MGT-14 with Registrar within 30 days of passing of Special Resolution.

Attachments:
  • Notice of General Meeting along with Explanatory Statement.
  • Certified True copy of Special Resolution.
  • Minutes of General Meeting

File SH-7 with Registrar within 30 days of passing of Special Resolution.

Attachments:
  • Certified True copy of Special Resolution.
  • Minutes of General Meeting.

Also Read: Ease of doing Business and Form INC 29 for Formation of Company

Related posts

Deferred Tax Disclosure and Format

Author

Issue of Bonus Shares under Companies Act 2013

Vivek RaM

Leave a Comment