Redeemable preference shares, as per Companies Act 2013, are those that can be redeemed after a period of time (not exceeding twenty years). The Articles of Association must, however, authorise the company to do so. Redeemable preference shares are only one among many other types of preference shares, such as cumulative, participating and convertible preference shares.
When can preference shares be redeemed?
There are certain provisions that need to be fulfilled, under Section 48 of the Companies Act, 2013, for preference shares to be redeemed.
1. The redeemable preference shares must be fully paid-up.
2. The redeemable preference shares can be redeemed only if the terms laid down at the time of issuing are met.
However, on approval of shareholders and under the conditions laid down in Section 48 of the Act, certain provisions can be altered/modified. These include redemption of shares at a fixed time or during a particular time period or at the time the shareholders and/or the company have approved and ratified.
The particular sum received after redemption of shares can be kept as Capital Reserve and can be utilised for any bonus on the issue of shares. This sum, in the Capital Redemption Reserve, is treated as Paid-up Capital by the company.
Process for Redemption of Preference Shares
These steps must be followed in order to redeem the preference shares:
1. A meeting of the general body needs to be called. A notice needs to be issued to the directors and stakeholders regarding the meeting. This needs to be done at least seven days prior to the meeting.
2. At the general body meeting, a resolution needs to be passed regarding the preference shares, the rules agreed upon, the type of preference shares to be issued and also the number of shares. Also, the resolution for issuing of preference share and a letter for redemption needs to be passed during the meeting.
3. Within 30 days of the resolution, SH- 7 needs to be filed with the Registrar. The SH-7 should contain the minutes of the meeting (the General Board meeting where the resolution was passed) and a true copy of the resolution signed by all the members of the board.
What are Preference Shares?
1. Preference shares can be allotted by companies to any investor, with the agreement that whenever dividend is paid, the holders of the preference shares are the first to be paid.
2. Preference shares enjoy certain benefits as against the other shares.
3. The dividend of a preference share is fixed at a particular rate (or a fixed amount) even before the dividend on equity shares.
4. The preference shares must be repaid before all other investors and shareholders in the event of the winding up of the company.
5. The issue of preference share is done as per the rules prescribed under Section 48 of the Companies Act, 2013.
Types of Preference Shares
There are eight types of preference shares. In case of dissolution of the company, any of the eight types would be paid out before other types of equity. Let’s understand each of them:
Cumulative: As the word indicates, all dividends are carried forward until specified, and paid out only at the end of the specified period.
Non-cumulative: The opposite of cumulative, obviously. Dividends are paid out of profits for every year. There are no arrears carried over a time period to be paid at the end of the term.
Redeemable: Such preference shares can be claimed after a fixed period or after giving due notice.
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.
Convertible: The shares can be converted into equity shares after a time period, or as per the conditions laid down in the terms.
Non-convertible: Non-convertible preference shares cannot be, at any time, converted into equity shares.
Participating: 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: 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.