Redemption of Preference Shares: Legal Requirements and Processes

The redemption of preference shares refers to the repayment of preference share capital to shareholders. This process is governed by various legal requirements and procedures under the Companies Act, 2013, and other regulations. Companies can redeem their preference shares under specific conditions, including at a fixed time, upon the occurrence of a particular event, at the company’s option, or at the shareholder’s option.

Legal Provisions under the Companies Act, 2013

Section 55 of the Companies Act, 2013:

1. No Issuance of Irredeemable Preference Shares: Companies limited by shares are strictly prohibited from issuing irredeemable preference shares. This ensures that shareholders have a definitive timeline for the redemption of their investments.
2. Authorization and Redemption Period: Companies limited by shares may issue redeemable preference shares if authorized by their articles of association. These shares must be redeemed within a maximum period of 20 years from their issuance date. The Act prescribes specific conditions under which these shares can be redeemed to protect investor interests.

Special Provisions:

1. Infrastructure Projects: For companies engaged in infrastructure projects, the Act provides an exception allowing the issuance of preference shares for periods exceeding 20 years. However, companies must redeem a specified percentage of these shares annually, ensuring steady returns to investors.
2. Redemption from Profits or Fresh Issue: Preference shares can only be redeemed from the company’s profits that are available for dividend distribution or from the proceeds of a fresh issue of shares. This ensures that the company’s liquidity and financial stability are not adversely affected by the redemption process.
3. Fully Paid Shares: Preference shares must be fully paid-up before redemption. This protects the company from financial strain and ensures that all obligations to preference shareholders are met.
4. Capital Redemption Reserve Account: When shares are redeemed from profits, an equivalent amount to the nominal value of the shares redeemed must be transferred to the Capital Redemption Reserve Account. This maintains the company’s capital structure and protects creditor interests.
5. Premium Payable on Redemption: Any premium payable on the redemption of preference shares must be paid out of the company’s profits or from the securities premium account. This ensures that the company does not face unexpected financial burdens.

Procedure for Redemption

1. Prior Intimation about Board Meeting:
2. Under Regulation 50 of the Securities and Exchange Board of India(SEBI)  Listing Obligations and Disclosure Requirements (LODR), 2015, listed entities must notify the stock exchange at least eleven working days in advance of a board meeting concerning preference share redemption. This ensures transparency and informs stakeholders about significant financial decisions.
3. Convene a Meeting of Board of Directors:

2. Notice Issuance:
   • Send a notice of the board meeting to all directors at least seven days before the meeting. The notice must include the agenda and notes, ensuring that directors are well-prepared to discuss the redemption.
3. Board Resolution:
   • Approve the redemption of preference shares through one of the following methods:
     • Redemption from company profits.
     • Redemption from the fresh issue of securities.
     • A combination of both.
   • Record Date:
     • For listed non-convertible preference shares, determine the record date as per Regulation 60 of the SEBI (LODR), 2015. This date is crucial for identifying shareholders entitled to receive the redemption amount.
   • Authorize Filing:
     • Empower the Company Secretary, Chief Financial Officer, or a director to file the redemption notice with the Registrar of Companies.
   • Inform Stock Exchange:
     • Promptly inform the stock exchange about any actions related to the redemption, ensuring compliance with regulatory requirements.
4. Payment of Redemption Amount:
5. The company must pay the redemption amount and any applicable premium to the redeemable preference shareholders, fulfilling its financial obligations.
6. Transfer to Capital Redemption Reserve Account:
7. When shares are redeemed from company profits, an equivalent nominal amount must be transferred to the Capital Redemption Reserve Account. This maintains the company’s capital base.
8. Entries in the Register of Members:
9. Update the Register of Members in Form MGT-1 within seven days of the board meeting approving the redemption. This ensures that all changes in shareholding are accurately recorded.
10. Intimation to Registrar of Companies (ROC):
11. File a notice for the redemption of preference shares with the ROC in Form SH-7 within 30 days. Attach the following documents:
    • Certified true copy of the board resolution.
    • Altered articles of association (if applicable).
    • Any other relevant information.

When Redemption Amounts to Reduction of Capital

Reduction of Share Capital under Section 100 of the Companies Act 2013

The section outlines methods for reducing share capital, which includes scenarios where redemption of preference shares may be considered a reduction of share capital, requiring adherence to specific legal provisions.

1. Extinguish/Reduce Liability:
2. Reduce liability on unpaid share capital, providing relief to the company from future payment obligations.
3. Cancel Lost/Unrepresented Capital:
4. Cancel paid-up share capital that is lost or unrepresented by assets, reflecting a more accurate financial position of the company.
5. Pay Off Excess Capital:
6. Pay off capital that exceeds the company’s needs, optimizing the company’s capital structure.

Frequently Asked Questions

1. What is the maximum period for which preference shares can be issued under the Companies Act, 2013?

Preference shares can be issued for a period not exceeding 20 years. However, for infrastructure projects, this period can be extended with annual redemption of a specified percentage of shares.

2. Can a company redeem preference shares that are not fully paid?

No, preference shares must be fully paid before they can be redeemed.

3. What is a Capital Redemption Reserve Account?

It is a reserve into which an amount equivalent to the nominal value of the redeemed shares must be transferred from profits available for dividend.

4. What forms are required to be filed with the ROC for redemption of preference shares?

Form SH-7, along with necessary attachments like the certified copy of the board resolution and altered articles of association (if applicable), must be filed with the ROC within 30 days of redemption.

5. What is the role of the board of directors in the redemption of preference shares?

The board of directors must convene a meeting, approve the redemption process, and authorize necessary filings and payments related to the redemption of preference shares.

Conclusion

The redemption of preference shares involves several legal and procedural steps to ensure compliance with the Companies Act, 2013. Companies must adhere to these requirements to facilitate a smooth and lawful redemption process, safeguarding the interests of all stakeholders involved. InstaFiling streamlines the preference share redemption process by ensuring compliance with the Companies Act, 2013, and SEBI regulations. Our experts handle all necessary documentation, filings, and regulatory communications, ensuring accuracy and timeliness. With InstaFiling companies can ensure a smooth, lawful redemption process, safeguarding the interests of all stakeholders involved.