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PREFRENCE SHARES
Definition: Preference shares allow an investor to own a stake at the issuing company
with a condition that whenever the company decides to pay dividends, the holders of
the preference shares will be the first to be paid.
SERIES No.36
Capital stock which provides a specific dividend that is paid before any dividends are paid to common
stock holders, and which takes precedence over common stock in the event of a liquidation. Like
common stock, preference shares represent partial ownership in a company, although preferred
stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike
common stock, preference shares pay a fixed dividend that does not fluctuate, although the company
does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning
preference shares are that the investor has a greater claim on the company's assets than common
stockholders. Preferred shareholders always receive their dividends first and, in the event the
company goes bankrupt, preferred shareholders are paid off before common stockholders. In general,
there are four different types of preferred stock:
I.
II.
III.
IV.
Preference shares are considered as quasi/debt instruments since they combine the features of equity
as well as debt. On one side, they carry a preferential right over the ordinary shares to receive
dividend at a fixed rate and on the other, they carry an equity risk of not being secured, except to the
preferential right of repayment in case of winding/up of the company. Preference shares have proved
beneficial for investors, since such quasi/debt instrument provides protection to their investment by
possessing voting rights on matters affecting their interest, more so with the fixed rate of dividend.
CS Divesh Goyal
Practicing Company Secretary, Delhi
GOYAL DIVESH & ASSOCIATES
For the promoters, issue of preference shares to investors ensures access to capital without a need to
provide any security, with a continued control.
Advantages of preference shares: The main advantage of preference shares over equity shares is that
They enjoy a preferential right to dividend and
Repayment of capital in case of winding/up of the company.
Disadvantages of preference shares:
The main drawback of preference shares is that they carry limited voting rights:
Generally, an equity share confers on its holder a right to vote on all resolutions that require
shareholder approval under the Act, any other law, or the articles of association of the company.
Equity shareholders, among others, enjoy the right to appoint and remove directors and auditors, and
approve the companys accounts.
Therefore, the control of a company is in the hands of its equity shareholders.
As distinguished from an equity share, a preference share carries voting rights only with respect to
matters which directly affect the rights of the preference shareholders. Due to these limitations on
voting rights, a preference shareholder does not have much control over the company. However, a
preference shareholder may acquire voting rights on par with an equity shareholder if the dividend
on preference shares is in arrears:
Procedure for Issue of Preference share is given under Section/62 of Companies Act, 2013. Issue of
share can be in three modes:
1. Right Issue of Shares [Section/ 62(1) (a)]
2. Preferential Allotment of Shares. [Section/ 62(3) (c) and Section/42]
3. Private Placement of Shares. [Section/42)
In my earlier articles I already discussed in detail the procedure for issue of shares by Right Issue and
Private Placement. Same Procedure will be applicable on issue of Preference Shares.
CS Divesh Goyal
Practicing Company Secretary, Delhi
GOYAL DIVESH & ASSOCIATES
CS Divesh Goyal
Practicing Company Secretary, Delhi
GOYAL DIVESH & ASSOCIATES
B. It is mandatory for every company issuing preference shares to redeem it within a period of 20
years from the date of issue.
C. A company may issue preference shares for a period exceeding 20 (Twenty) years for
infrastructure projects. Subject to Redemption of a Minimum 10% of such preference shares per
year from the 21 (twenty first) year onward or earlier, on proportionate basis, at the option of
preference share holder. (As per rule/ 10 of The Companies (Share Capital and Debentures) Rules,
2014.
Issuance of preference shares, Explanatory Statement should mention following information: (Rule 9 of
Companies (Share Capital and Debentures) Rules, 2014)
a) Size of the issue and number of preference shares to be issued and nominal value of each
share;
b) Nature of such shares i.e. cumulative or non / cumulative,
participating or non / participating, convertible or non
convertible.
c) Objectives of the issue;
d) Manner of issue of shares;
e) Price at which such shares are proposed to be issued;
f) Basis on which the price has been arrived at;
g) Terms of issue, including terms and rate of dividend on each share, etc.;
h) Terms of redemption, including the tenure of redemption,
redemption of shares at premium and if the preference shares
are convertible, the terms of conversion;
i) Manner and modes of redemption;
j) Current shareholding pattern of the company;
k) Expected dilution in equity share capital upon conversion of preference shares.
CS Divesh Goyal
Practicing Company Secretary, Delhi
GOYAL DIVESH & ASSOCIATES
STEP/1I
Hold the Board Meeting:
Check the quorum of Board Meeting.
Approve right issue including "letter of offer", which shall include right of renunciation
also. (At Board Meeting).
Pass Board Resolution for approval of offer letter.
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.
STEP/1II
Hold Extra Ordinary general Meeting:
Check the quorum of Meeting.(Section/103).
Present Offer Letter in PAS/4 before the members of the meeting.
Pass Special Resolution for Private Placement of Shares. [For every such offer separate
Special Resolution is required].
Check whether auditor is present, if not. Then Leave of absence is Granted or Not. (As per
Section/ 146).
STEP/1V
File Form with Registrar:
File MGT/14 with Registrar within 30 days of passing of Special Resolution.
Attachments:
File Form with Registrar:
File MGT/14 with Registrar within 30 days of passing of Special Resolution.
Attachments:
STEP/V
Circulate Letter of Offer:
CS Divesh Goyal
Practicing Company Secretary, Delhi
GOYAL DIVESH & ASSOCIATES
(Through registered post or speed post or through electronic mode to all the existing share
/holders at least three days before the opening of the issue.)
Offer shall be open for period Not less than 15 (fifteen) days or not more then 30 (Thirty) days.
STEP/VI
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
STEP/VI
Receive acceptance/renunciations/rejection of rights from members to whom offer has been sent &
also from persons in whose favour right renounced.
STEP/VII
Call Board Meeting after receiving of allotment of money.
Issue Notice of Board Meeting to all the directors of company at least 7 days before the date
of Board Meeting. [Section/173(3)]
Attach Agenda of Board Meeting along with Notice.
STEP/IX
Hold the Board Meeting:
Approve allotment by passing of Board Resolution. And present list of allottees before the
Board
Pass Board Resolution for allotment of shares (within 60 days of receiving of money).
Authorize a director to file E/form PAS 3(Return of Allotment) to ROC within 30 days of
passing of Resolution.]
CS Divesh Goyal
Practicing Company Secretary, Delhi
GOYAL DIVESH & ASSOCIATES
STEP/X
File form with ROC: {As per Section 39(4) and rule 12 of Companies (Prospectus and allotment of
Securitas) Rules, 2014.
File PAS/3 with Registrar of Company.
ATTACHMENTS:
List of Allottes.
Board Resolution for allotment of Shares.
STEP/XI
Issue Share Certificate:
Issue Share Certificate in Form/ SH/1 (As per Section/56 with in 2 (two) months from the
date of allotment of shares.
Note
(Author CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice
from Delhi and can be contacted at csdiveshgoyal@gmail.com) Disclaimer: The entire
contents of this document have been prepared on the basis of relevant provisions and as per
the information existing at the time of the preparation. Though utmost efforts has made to
provide authentic information, it is suggested that to have better understanding kindly crosscheck the relevant sections, rules under the Companies Act, 2013. The observations of the
author are personal view and the authors do not take responsibility of the same and this
cannot be quoted before any authority without the written
CS Divesh Goyal
GOYAL DIVESH & ASSOCIATE
Mob: +91-8130757966