How to Issue Preference Shares

Preference shares are a class of shares of a company that entitles the shareholder to fixed dividends on preference over ordinary shares. A

private limited company or limited company in India can issue preference shares, subject to approval by the articles of association of the company and the Board of Directors. In this article, we look at the procedure for issuing preference shares.

Key Aspects

Ensure the company is limited by shares.
Ensure the Articles of Association of the company permits issue of preference shares.
Preference shares must be redeemed within a period of 20 years from the date of issue. Only companies involved in infrastructure projects can issue preference shares redeemable over 20 years from date of issue.

Step 1: Call Board Meeting

Call a Board Meeting by giving not less than 7 days of notice to every director of the company. Decide on the date, time, place and agenda for calling a General Meeting to pass a special resolution for issuing preference shares.

Step 2: Draft a Board Resolution

Prepare a board resolution for issue of preference shares. The board resolution must address aspects such as:

Priority with respect to payment of dividends and capital
Participation in surplus funds
Participation in surplus assets and profits, on winding up of company
Payment of dividend - cumulative or non-cumulative basis.
Conversion of preference shares in equity shares.
Voting rights
Redemption of preference shares.

Step 3: Draft Explanatory Statement to Board Resolution

Prepare an explanatory statement to the Board Resolution with all the facts pertaining to the proposed issue of preference shares. The explanatory statement must include information such as:

Size, number of preference shares to be issued and value of each share.
Nature of shares to be issued, cumulative or non-cumulative, participating or non-participating, convertible or non-convertible.
Objectives of the issue.
Manner of issue of shares.
Price at which shares are to be issue.
Basis on which price was calculated.
Terms of issue, including terms and rate of dividend (coupon rate) on each share.
Terms of redemption, including tenure of redemption, redemption of shares at premium and terms of conversion, if applicable.
Manner and modes of redemption.
Current shareholding pattern of the company.
Expected dilution in equity on conversion, if applicable.

Step 4: Conduct Board Meeting

Conduct a General Meeting as per the notice to board meeting and pass the special resolution.

Step 5: File MGT-14

File the special resolution approved in the Board Meeting with the ROC using Form MGT-14 within 30 days. MGT-14 must contain a copy of the approved special resolution and the explanatory statement. The form must be digitally signed by managing director or director or secretary of the company authorised by the Board. In addition, the form must also be digitally signed and certified by a Chartered Accountant or Cost Accountant or Company Secretary in whole-time practice.

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Frequently Asked Questions

Common questions about Issuing Preference Shares in India.

Preference shares entitle the shareholder to fixed dividends on preference over ordinary shares. Companies issue preference shares to raise additional capital without diluting the voting rights and control of existing equity shareholders.

The key aspects to consider are ensuring the company is limited by shares, confirming the Articles of Association permits issuance of preference shares, and adhering to the 20-year redemption period, except for companies involved in infrastructure projects.

The first step is to call a Board Meeting by giving not less than 7 days of notice to every director of the company, and deciding on the date, time, place, and agenda for calling a General Meeting to pass a special resolution for issuing preference shares.

The Board Resolution should address aspects such as priority with respect to payment of dividends and capital, participation in surplus funds and assets, dividend payment basis (cumulative or non-cumulative), conversion to equity shares, voting rights, and redemption terms.

The Explanatory Statement should include details like the number and value of preference shares, nature of shares (cumulative, participating, convertible), objectives of the issue, issue price and basis for pricing, terms of issue and redemption, current shareholding pattern, and expected dilution on conversion.

After conducting the Board Meeting and passing the special resolution, the company must file the resolution with the Registrar of Companies (ROC) using Form MGT-14 within 30 days.

Form MGT-14 must contain a copy of the approved special resolution and the explanatory statement, and be digitally signed by the managing director, director, or company secretary authorized by the Board. It must also be certified by a Chartered Accountant, Cost Accountant, or Company Secretary in whole-time practice.

No, preference shares must be redeemed within a period of 20 years from the date of issue, except for companies involved in infrastructure projects, which can issue preference shares redeemable over 20 years.

Preference shares can be cumulative or non-cumulative, participating or non-participating, and convertible or non-convertible. The nature of the shares must be specified in the Board Resolution and Explanatory Statement.

Yes, a private limited company or limited company in India can issue preference shares, subject to approval by the articles of association of the company and the Board of Directors.