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. 

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Know About Types and Difference Between Equity and Preference Shares

Before going over the difference between equity and preference shares lets understand the meaning of shares. Funds are required for running any business whether big or small. There are a lot of sources in the market from which an individual can raise funds for the business. Share is a source of raising funds for the fulfillment of day to day or other types of requirements of a company. 

Share is a part of equity if a company. It denotes the ownership of a company. If you own 10% shares of a company it means that you own 10% of the company. The rate of shares keeps fluctuating according to the demand in the market. 

There are two Types of Shares Equity Shares and Preference Shares. Both are similar in a lot of ways but have some characteristic differences that separate them from each other. 

Read Also: Equity Shares: Classification, Benefits & Drawbacks

Equity Shares:

The word shares are often referred to the equity shares. When people say shares they generally mean equity shares. Equity shares provide a part of ownership in a company thus involves a lot of risks. 

Dividends received by the Equity Shareholders depend upon the total profit earned by the company so it is possible that equity shareholders may not get any dividend if the company has insufficient profits at its disposal.

Preference Shares:

The preference shareholders are given preference over the equity shareholders when provided dividend by the company. The preference shareholders are given a fixed percentage of dividends despite the change in the profits of the company. The percent of dividend is pre-decided and written on the preference share agreement. 

Difference Between Equity and Preference Shares:

• Rate of Dividend

The rate of dividend received by the preference shareholders is fixed unlike that of equity shareholders as equity shareholders receive dividends according to the profits earned by the company.

• Issue of Shares

It is mandatory to issue equity shares through Initial Public Offer while the issuance of preference shares depends upon the wishes of the company.

• Trade

Equity shares can be traded in the share market easily while the preference shares can not. Thus there is no change in the face value of preference shares over time.

• Types of Shares

There are different types of preference shares like participating preference shares, convertible preference shares, etc. but there is only one type of equity share.

• Price

The price of preference shares is higher than that of equity shares which means it can not be afforded by everybody.

• Handling while Liquidation

The preference shareholders are paid before the payments of equity shareholders in case of liquidation of the company.

• Repayment

The preference shareholders are repaid by the company after a fixed period of time while the equity shareholders may or may not get repaid.

• Voting Rights

The equity shareholders enjoy the right to vote in the AGMs and GMs of a company, but the preference shareholders are not given the right to vote.

• Bonus Shares

The equity shareholders can easily claim bonus shares, unlike the preference shareholders. 

• Dividend

If the preference shareholders are not given dividends for a year then it gets accumulated in the next year, while equity shareholders may or may not receive a dividend for any year. 

• Conversion

The preference shares can be converted into equity shares but equity shares can not be converted. 

Read Also: Shares and Debentures: Similarities & Dissimilarities

Both types of shares have their own benefits. It totally depends on the needs of an individual, which one does he want to purchase.

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Shares and Debentures - The Capital Raising Tools for Companies

Running a startup is an unrealistic idea until you have a huge amount of money/capital to invest in the assets and infrastructure. Making huge investments alone is quite impossible for any individual or group and here comes the need for them to ask for help (capital) from the outsiders (investors) in lieu of the shares/debentures in the company. 

However, there are other ways for a company to get loans but the most preferred way of raising the capital for them is by issuing the shares and debentures in their company to potential investors. There is a cyclic process of development, the more the investors invest in companies, the more the companies will yearn profits which will lead the company to progress. The company earning good will give more profits to its stakeholders who are owning shares and debentures in the company. 

Shares and Its Kinds

Shares are granted by the company in lieu of the investment made by the investor and thus the investor/shareholder becomes a partial owner in the company. The entire capital needed by the company is divided into smaller units that have the same monetary value. These units or Shares are offered to the investors in lieu of capital given by them. Further the transaction of shares is authenticated by the purchase issued by the company to the shareholder. The purchase is called ‘Share Certificate’. 

The value of shares for purchase is called ‘Share Price’ and the actual value of the shares that is written in the books of account is called Par/Nominal/Face value of the shares. From the overall profit earned a part is kept with the company and the rest is diffused in between the shareholders in the form of ‘Dividend’. 

‘Dividends’ are the returns of the investment made by the investor. 

Also Read:- All You Need to Know About Debentures, Its Types, Advantages and Disadvantages

Kinds of Shares

• Equity Shares - One cannot redeem the shares once they have invested in it. The only way here to get the money before the dividend is by selling the shares to another investor who is interested in the deal. While dispersing the dividends equity shareholders will get their percentage after the preference shareholders are done. Equity Shareholders have Voting Rights in the Company. 

• Preference Shares - Such shareholders are paid dividends at a fixed rate and get an upper-hand when it comes to paying dividends. Such shareholders have on voting rights in the company’s major decisions. 

Debentures and Its Kinds

A business needs capital to progress and therefore it takes loans from the potential investors in lieu of Debentures. Debentures can be held by banks, financial institutions, and individual investors. People or groups owning debentures are called ‘Debenture Holders’ in the company and the proof of ownership they hold is called 'Debenture Certificate’.

Debenture holders in the company are also denoted as ‘Creditors’. The group of debenture holders is paid no matter if the company is in a loss or profit. Interests are paid to the investors (on regular intervals or upon maturity) and the loan amount is repaid to them upon maturity of ‘Loan Bond’. They are denied any voting rights in the company.    

Kinds of Debentures

Depending on the nature of payment or maturity period, below mentioned are some types of debenture:

1. Redeemable Debentures
2. Irredeemable Debentures
3. Bearer Debentures
4. Registered Debentures
5. Convertible Debentures
6. Naked Debentures

Shares V/S Debentures

Though both are the mediums of raising capital for the company there is a difference in the pattern the profit is distributed among the Types of Shares and Debentures.

• Returns

Shares - The rate of dividend is entirely based on the profits earned by the company.

Debentures - The rate of interest is fixed no matter if the company is in profit or loss.

• Payment Policies

Shares - Shareholders are paid after debenture holders get their interest.

Debentures - Debenture holders get the priority over shareholders when it comes to payment of interest or dividend.

• Obligations

Shares - The dividend earning of the shareholder entirely depends on the profit earned by the company. The company is not obliged to pay if there is no profit.

Debentures - The company is obliged to pay interest to the debenture holders no matter the company is in profit or loss. It is anyways the interest on the loan that the company has taken and it needs to repay.

• Companies Exiting

Shares - Shareholders might lose their part of ownership in companies’ profits if the company winds up its business.

Debentures - Companies while winding up their business are liable to pay the entire amount of the investment to debenture holders.

• Right To Vote

Shares - Shareholders enjoy the right to vote in the major decisions of the company.

Debentures - Debenture holders are denied any voting rights in the major decisions of the company.

• Companies Exiting

Shares - Shareholders might lose their part of ownership in companies’ profits if the company winds up its business.

Debentures - Companies while winding up their business are liable to pay the entire amount of the investment to debenture holders.

• Risk

Shares - The risk of losing the profit is more are the shareholders are paid from the residual profit of the company.

Debentures - The risk of profit earning is NIL as they get timely interests and loan repayment on contract maturity regardless of the company’s condition in the market.

• Redeemability

Shares - The shares once purchased are non-redeemable except in the case of preference shares.

Debentures - They can only be redeemed upon maturity. Interests are paid at regular intervals or in any other pattern decided.

• Maturity

Shares - Shares have no maturity period and therefore are paid only upon closing.

Debentures - Debentures have a maturity period that is mentioned on the debenture certificate and the company is required to repay upon maturity of those debentures.

Also Read:- Equity Shares: Classification, Benefits & Drawbacks

In the End

By the above discussion, it is evident that both shareholders and Debenture holders can be called investors of the company. Every company tries very hard to maximize the returns to shareholders and also to pay interest to debenture holders in time. By increasing the shareholder’s wealth company makes its shareholders loyal to the company for a lifetime.

Debenture holders and shareholders both are contributors to the progress of any company. Clearly debenture holders are a priority at the time of payment but a company never fails to bring in profits for its shareholders as well. In the worst cases, this happens that shareholders are left barehanded. Companies always try to yearn profit for themselves and their shareholders so that they (companies) can sustain for long. In fact, the right to vote is a benefit given to the shareholders because they are the ones who will be equally affected by the progress or breakdown of the companies.

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SAG RTA: Benefits As Preferred Choice of Investors & MF Houses

SAG Infotech is one of the most trusted names when it comes to tax software providers. The company is standing high and is consistently setting standards for its counterparts for the past 20+ years in India. After proving its excellence in the field of tax software development it has stepped out to facilitate the public with its new Registrar and Share Transfer Agent.

SAG RTA is a venture of SAG Infotech and is also the first SEBI qualified RTA agency Pan Rajasthan. SEBI being an inspection department for the entire mutual fund transactions closely investigates the potential of an entity for becoming an RTA. 

SAG RTA is glad to have successfully qualified the SEBI investigation and become the first Registrar and Transfer Agent agency in Rajasthan. 

SAG RTA is now willing to keep up to the expectations of its associated clients and is dedicated to providing top class RTA facilities to individuals or entities associated with it.

Read Also: Registrar Transfer Agent Benefits To Mutual Fund House

Below-mentioned is the reasons why one should opt for SAG RTA services and how they are benefitted:

1. Top Class RTA Services - SAG RTA effectively offers the entire RTA services to its valued clientele. From dematerialization of shares to transaction record-keeping, executing share transfer, investor data-keeping, query handling, dividend payout, and lot more. SAG RTA offers its expert services when it comes to opening a Demat Account with Depository participants and converting the physical shares to electronic form. SAG RTA is a third party intermediary between the MF house and investor.    
2. Availability of Entire RTA Application Forms - SAG RTA is capable of providing various application forms required by the investors, MF houses, public limited companies, and other relevant agencies related to Mutual Fund compliances. The said application forms (as authorized by the government) could easily be downloaded from SAG RTA website. SAG RTA allows download and submission of crucial forms like a request for the change in address/name/signature, security transfer form.    
3. Uniques Dashboard Availability (Individuals and Professionals) - SAG RTA facilitates all its clients (investors or professionals) with a unique dashboard login facility on the website. Professionals like CA and CS can also avail of dashboard login services. 
4. Firm Links With National Depositories - SAG RTA has strong links with the two main national depositories namely Central Depository Services (CDSL) and National Securities Depository Limited (NSDL). This is the plus point for the MF houses or investors associated with SAG RTA as it is easy for them to place applications on these giant depositories with SAG RTA being the medium.    
5. Affordable Services - SAG RTA is capable of satisfying and retaining its clients through its complete RTA related Services and that too in pocket-friendly prices. Pocket-friendly prices of SAG RTA is another advantage that keeps it on the preferred list of the customers.     
6. Expert Backend Support - Associated clients can easily reach us via call or SMS and gain knowledge or ask any query related to Mutual Funds. SAG RTA’s expert team is a service for the associated Mutual Fund house in terms of client deal. Apart from customer support, the expert team will also help the company validate its MF data, preserve it and present it in front of the authorities as and when needed.    
7. Timely Updates - Last but not least, the company constantly keeps its users updated with the stirs of the Mutual Fund market, the related new laws, compliance requirements, amendments in the application form and so on. SAG RTA is known to follow the entire protocol set by the government in terms of MF management and it effortlessly coordinates with the changes in the laws designated by the government.

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