Procedure for Issue of Preference Shares

What is Preference Share Capital?

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.

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Applicable Rules and Section

Section 55- Issue and Redemption of Preference Shares, Rule-9-Companies (Share Capital and Debentures) Rules, 2014.

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Kinds of Preference Shares

Preference shares can be classified into 8 types

1. Cumulative Preference Shares

Cumulative preference shares means dividends are carried forward and paid only at the end of specified period.

2. Non- Cumulative Preference Shares

It is opposite of Cumulative Preference Shares. Dividends are paid out of profit every year

3. Redeemable Preference Shares

Such preference shares can be claimed after a fixed period or after giving due notice.

4. Non-Redeemable  

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.

5. Convertible Preference Shares:

The shares can be converted into equity shares after a time period, or as per the conditions laid down in the terms.

6. Non-convertible Preference Shares:

Non-convertible preference shares cannot be, at any time, converted into equity shares.

7. Participating Preference 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.

8. Non-Participating 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.

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Methods to issue Preference Share

1. Right issue or Bonus Issue
2. Private Placement

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Modes of Issue of Preference Shares

1. Rights Issue under Section 62(1)(a)only to the existing Equity Shareholders; or
2. ESOP Under Section 62(1)(b)specifically provides for the issue to the employees
3. Private Placement of Shares under section Section-42.

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Pre requisites for Issue of Preference Shares

Following are some pre-requisite  conditions for issue of preference shares

1. Approval by Special Resolution
   For Issue of Preference Shares, approval of shareholders is must by way of passing of special resolution.

2. Authorisation in Articles of Association (AOA)

Before issue of preference shares, check whether Articles of Association permits, if not then AOA needs to be amended.

3. Maximum no of persons to whom offer can be made

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.

4. Name of Allotees

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.

5. Offer Letter

The Company shall prepare the offer letter in form PAS-4 and maintain the complete record of PAS in form PAS-5.

6. Time for completion of allotment

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

Or

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.

7. Valuation Report

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.

8. Value of Offer and invitation:

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.

9. Application Form:

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. 

10. No further offer till completion of earlier offer:

No offer shall be made unless allotments with respect to offer or invitation made earlier completed.

11. 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).

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Procedure for Issue of Preference Shares

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- For alteration of share capital Approval of offer letter for  Issue of Preference shares along with explanatory statement containing- No. of Preference, Nominal Value of the Shares Type of preferential allotment Terms of issue, rate of dividend, terms & tenure of redemption. Price at which shares are proposed to be issued & and method of valuation.
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 Payment of dividend on cumulative/non-cumulative basis. Conversion of preference into equity. Voting rights (limited to the matters related to preference shareholders only). Terms of redemption.
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. Documents: Notice of General Meeting along with Explanatory Statement. Certified True copy of Special Resolution. Minutes of General Meeting Altered MOA
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- Present List of Allottees before the Meeting. Pass Board Resolution for allotment of shares (within 60 days of receiving of money). Pass Resolution for issue of Share Certificate in same Meeting. Authorize to two directors and a authorize person to sign share certificate.
Step 10: File Form PAS-3	Form PAS-3 needs to be filed with ROC  within 15 days from the date of allotment. Documents List of Allotees Board Resolution for allotment of Shares.
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.