What All You Must Know About The Allotment of Preference Shares?

Preference Shares

Shareholders have percentage ownership in the profits of the company and if talking about Preference Shareholders, they are the ones who are paid before the regular shareholders at the time of maturity. 

As per Explanation (ii) section, 142 of Companies Act 2013, Preference Shares are a part of the company’s capital, the owners of which are preferred over others when it comes to payment of dividends (fixed amount or rate) or at the time of repayment of shares when the company is permanently winding up. 

As per Explanation (ii) section 142 of Companies Act 2013, the category of shares showing any of the below-mentioned characteristics are considered to be preferential shares: 

• Preference shareholders have the right to own the normal shares in a certain amount. 
• While dividend payout preference shareholders are allowed to participate (fully or partially) in the distribution of surplus profit of the company. 
• Preference shareholders are paid the first whenever the company decides to disperse the profits. 

Read Also: Preference Shares and Its Different Types?

Sub-Categories of Preferential Shares

There are a total eight kinds of preferential shares allotted to the shareholders as per their choices and availability in the share market. They are different from each other but share one common characteristic and that is they all are paid before ‘Equity Shares’. 

• Cumulative: Annual payment (at fixed rates). If the company fails to pay then the liability adds on to the next year’s liability.  
• Non-cumulative: Annual payment (at fixed rates). If the company fails to pay in the current year liability shall not be carried to the next year.  
• Redeemable: These shares can be redeemed either after a specific period or after giving due notice (by the shareholder). 
• Non-Redeemable: These cannot be redeemed under any situation until the maturity (at the time of winding up). 
• Convertible: Such preference shares could anytime be converted into Equity Shares (under special circumstances). 
• Non-convertible: Such preference shares cannot be converted into any other kind of shares anytime. 
• Participating: Such shareholders have the right to participate in the company’s additional profits.  
• Non-Participating: Such shares provide no additional profit if the company has gained a surplus.

Who Can Avail of The Preference Shares in The Company?

• Existing Equity Shareholders. 
• Employees of the company
• Shares acquired via Private Placement of Shares.

Conditions For Preferential Allotment Of Shares

• The offer of shares has to be approved by the shareholders of the company. 
• Article of Association should issue shares through PAS.
• A company could offer the shares through a Private Placement Offer Letter to not more than 200 people. They can be individuals or any entity. 
• Finalising the ultimate achievers of the shares and the percentage offered to them.
• Allotment of preference shares takes around 12 months from the date of passing a special resolution. 
• The issuer company prepares an Offer letter in form PAS-4 and prepares PAS 5 for maintaining the records. The value of the offer made by the company should not be less than 20,000 (security face value). 
• The price of shares shall be determined as the price mentioned in the valuation report of the registered valuer. 
• With the offer letter, there is an application that has ab serial number and address of the person to whom shares are granted. 
• Till the allotment procedure is going on, the grant of any other share or security type is restricted. No invitation will be sent to the shareholder of any other kind of share purchase.   
• Payment for share allotment shall be done only via bank accounts. The shareholder must deposit the money in the company’s bank account that is especially for security money transactions (or repayment for securities).  
• Companies can not make share offers through advertisements or on social media (no right to inform the public on a large scale). 
• There is no limitation on a number of shares to be allotted to the shareholder in an FY. 

Process For Issuing Preference Shares

• Board meetings shall be held by the company and the approval of offer letter for preference shares having the name of the person to whom shares are allotted. 
• An explanatory statement containing a number of shares, nature, objective, price, current shareholding pattern, rate of dividend and other terms of allotment. 
• The company holding EGM - for presenting the prepared PAS-04 (offer letter) and pass the special resolution in front of board members. 
• Dispersing the offer letters accompanied by the application (either by a hard copy or electronic modes). 
• The company shall file SH-7 and MGT-14 with the registrar within 30 days of passing the special resolution. 
• Explanatory Statement, details of GM, duration of GM and certified true copy of Special Resolution (attachments with the forms). 
• Opening separate bank accounts for the transaction of securities. 
• Conducting a board meeting after allotment money is received. Issue notice of board meeting to all board members along with the agenda of the board meeting. 
• In the board meeting present the final list of allottees, board resolution for Allotment of Shares, pass a resolution for issuing Share Certificate, authorized persons to sign the share certificates. 
• The company must file PAS 3 with the registrar of companies along with documents such as a list of allottees, board resolution for allotment of shares.
• Dispersing Share Certificates in Form SH-1 two months from the date of allotment of shares. 
• Maintain a register of the members as mentioned U/S 88 of Companies Act 2013. 

Redeeming the Preference Shares

• There should be no balance in the payment for preference shares. 
• A company can redeem its shares only after a certain period, the company’s options or after due notice given by the shareholders, or at maturity. 
• CRR should be presented. 

Procedure to Redeem The Preference Shares

• Meeting of Board of Directors (issuing the notice 7 days before the board meeting is scheduled + agenda of the meeting)
• Passing Board Resolution related to Redemption of Preference Shares. 
• Present letter of redemption in the board meeting. 
• The company must file SH-7 within 30 days of passing the Resolution with a certified copy of the resolution.  

Read Also: Equity Shares: Classification, Benefits & Drawbacks

When Shares Cannot be Redeemed

• If the company is not able to redeem the shares or is unable to pay the shareholder then it is possible for the issuing company to replace the issue. 
• Redemption of preference shares by issuing new preference shares can be done only after the approval of the Preference Shareholders (at least 75% of the stakeholders should be in favor of the decision). 
• The Tribunal thereon orders the company to immediately redeem the preference shares of the shareholders who are showing their disapproval to the decision of the company.