How to Issue Preference Shares – Step by Step Guide
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.
- 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.