REDEMPTION OF PREFERENCE SHARES by CS YASH PAREEK (WWW.CSYASHPAREEK.IN)

 

||Om Shri Ganeshay Namah||

 

REDEMPTION

OF

PREFERENCE SHARES

TEAM YPA

Prepared by CS Yash Pareek

Valuable inputs by CS Neha Jain & CS Gajab Maheshwari

 

                                                                 www.csyashpareek.in

 

YASH PAREEK & ASSOCIATES

Company Secretaries

BHOPAL | INDORE | NAGPUR | AHMEDABAD

 

Reach us at:

Address: T-3, 3^rd Floor, 207, M.P Nagar, Zone-II, Bhopal-462011, M.P

Mobile No: 9111575222

Email id: pcsyashpareek@gmail.com

 

REDEMPTION OF PREFERENCE SHARES

 

Applicable Section of the Companies Act, 2013 (The Act):

·        Section 55 of the Act

·        Rule 9, Rule 15, Rule 5 of the Companies (Share Capital and Debentures) Rules, 2014

·        Section 64 of the Act

 

1.      Types of shares:

 

Shares are broadly classified under two categories:

 

1.1   Equity shares:

 

·        Without differential rights

·        With differential Rights

 

1.2   Preference shares:

 

·        Redeemable Preference shares

·        Compulsory Convertible Preference Shares

·        Optionally convertible Preference Shares

·        Cumulative and Non-cumulative Preference Shares

 

2.      Voting and Dividend on Preference shares:

 

Some broad aspects relating to voting and dividend on preference shares are as under:

 

2.1   Preference shares don’t carry voting rights unless resolution contains matter having impact on preference holders is put to vote as compared to equity which have voting rights on all resolutions.

 

2.2 However where dividend is not paid for a period of two years or more either at fixed rate or at fixed amount, such class of preference holders have the right to vote on all resolutions placed before the company.

 

3.      IR-Redeemable preference shares:

 

3.1   Pursuant to Section 55 of the Act, Company cannot issue irredeemable preference shares i.e. either preference shares are required to be redeemed or converted with in a period of 20 years from the date of issue except involved in infrastructural projects specified in Schedule VI of the Companies Act, 2013 (Term for infrastructural projects is 30 years subject to redemption of a minimum 10% of such preference shares per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders)

 

 

4.      Redemption of Preference shares:

 

4.1      A company may redeem its preference shares only on the terms on which they were   issued either:-

 

(a)    at a fixed time or on the happening of a particular event; or

 

(b)    any time at the company’s option; or

 

(c)    any time at the shareholder’s option.

 

4.2   Only fully paid preference shares are allowed to be redeemed. Redemption of preference shares may be made at par or at premium but not at a discount.

 

 

5.      Sources available for Redemption:

 

5.1         Sources available for redemption are as follows:

 

·        Profits of the company which would otherwise be available for dividend or

 

·        Out of the proceeds of a fresh issue of shares made for the purposes of such redemption; Fresh issue of shares can be of equity as well as preference or

 

·        Can be both.

 

5.2         Divisible profits generally means amount lying in Reserves and surplus after deducting following amount lying in:

·        Capital reserves

·        Securities premium account

·        Capital Redemption reserve

·        Debenture redemption fund

 

 

6.      Redemption out of Profits:

 

6.1   Company is required to transfer a sum equal to the nominal amount of the shares to be redeemed to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall apply as if the Capital Redemption Reserve Account were paid-up share capital of the company

 

6.2   Premium payable on redemption, if any, must be provided out of the profits of the Company.

However, company may make payment of premium from profits available in Securities premium account for

·        Redemption of any preference shares issued on or before the commencement of this Act or

·        If Company does not comply with the accounting standards.

 

 

7.      Failure to Redeem Preference shares and Application to NCLT

 

7.1   A Company may, with the consent of the holders of 3/4th in value of such preference shares and with the approval of the National Company Law Tribunal (NCLT) on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

 

The NCLT shall order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

 

8.      Procedure to Redeem preference shares:

 

Procedure to redeem preference shares is as under:

 

8.1   Convene board meeting:

 

Convene Board meeting after issuing seven days notice (other than held on shorter notice) along with agenda and notes to the directors of the company for passing board resolution for following mentioned matters:

 

·        To approve redemption of redeemable preference shares out of profits of the company or out of the proceeds of fresh issue of shares or with both.

 

·        To determine Premium amount payable on redemption along with date of redemption of shares.

 

·        To approve transfer of an amount equal to the nominal amount of shares to be redeemed to the Capital Redemption Reserve, if shares are proposed to be redeemed out of the profits of the company.

·        To approve the issue of fresh shares up to the nominal amount of the shares to be redeemed to the existing shareholders, if the redemption is to be made out of the fresh issue of shares.

 

·        To authorize CS or CFO or any director of the company to file the notice for redemption of preference shares with ROC.

 

8.2   Transfer of Redemption Amount:

 

Where the company has redeemed the preference shares out of the profits of the company then a sum equal to nominal amount of the redeemed preference shares shall be transferred to the Capital Redemption Reserve Account (CRR).

 

8.3   Payment to preference shareholder:

 

Make the payment of redemption amount along with premium amount to the preference shareholder.

 

 

8.4  Entry in the Register of Members:

 

Company shall make necessary entries in the Register of Members in Form MGT-1 within 7 days from the date of Board Meeting in which the redemption was approved.

8.5   Intimation to ROC by filing notice for Redemption in SH-7:

 

Company shall file a notice for the redemption of preference shares with ROC in Form SH-7 within 30 days from the date of such redemption along with the copy of Board Resolution authorizing redemption of redeemable preference shares.

 

 

9.      Points to be checked for Redemption of Preference Shares:

 

9.1   Check the Date and terms of issue of such shares as company may redeem its preference shares only on the terms on which they were issued.

 

9.2   Check the amount of non-payment of dividend if dividend has not been paid on such preference shares for any of the preceding financial years.

 

9.3   Check the amount lying in free reserves and securities premium account to ascertain the amount available for redemption of shares and payment of premium.

 

9.4   Check articles of association to ensure that clauses in AOA is complied with.

 

9.5   To ascertain source of amount of redemption between divisible profits or fresh issue of shares.

 

9.6   To ascertain premium payable on redemption

 

9.7   To check whether any variation with respect to the terms of issue of preference shares has been made in any preceding financial years.

Professionals and promoters needs to exercise detailed due-diligence before making an application for redemption of shares.

 

Happy reading.

 

Regards,

CS Yash Pareek   [ICSI Silver Medalist]

Company Secretary  I     Yash Pareek & Associates {www.csyashpareek.in/Professional}

Entrepreneur             I     Manomay Innovations Private Limited {www.manomay.co.in}

Social Worker            I     Rukmani Devi Pareek Charitable Foundation {www.csyashpareek.in/socialwork}

Contact No.:  9111575222       Website: www.csyashpareek.in

Office at T-3/207, Zone-II, M.P Nagar, Bhopal-462011, M.P

 Google         https://goo.gl/maps/iXKVRo6A5FUQzcj5A               

Just Dial    https://www.jdmart.com/GOJ-JUP1652612757?skip

You tube       https://www.youtube.com/channel/UCg5VPXertW0YWoM-sJcQKXA                

 Linked In https://www.linkedin.com/in/cs-yash-pareek-822978114/

Twitter       https://twitter.com/CSYashPareek1

Facebook    https://www.facebook.com/csyashpareek

Read and review our blogs on konnectwithyash.blogspot.com

 

 

 

Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I, CS Yash Pareek assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.