Company Share Transfer

Is public offer required to issue preference shares? -Detailed Inside

Preference Shares as defined under Section 42(ii) of the Companies Act, 2013, “share capital holders who have a preferential right overpayment of dividend”. Investors of preference shares get paid first whenever the company decides to wind up. Preference shareholders get a fixed amount of dividends. Companies Share Capital and Debenture Rules, 2014 provides the necessary procedure for the issue of preference shares. 

As per Section 42(iii), some of the specific shares with characteristics mentioned below specify as Preference Shares:

• Where no Approval of members is required for Rights Issue of Shares
• Shareholders in the event of winding up are entitled to participate either fully or to a limited extent in the surplus capital of the company.
• Shareholders can participate fully or to a limited extent in the capital, not having preferential treatment.

Can Preference Shares be issued without making Any Public offer?

The SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 under the Takeover Code provides for strict public offer rule if the shareholder wants to acquire shares over the limits prescribes. But an exception to this point has been made in Preference Shares. The Companies Act 2013 provides an exception to this Takeover Code for Preference Shares. Preference Shares do not carry voting rights, so they have been exempted. Therefore, any person acquiring preference shares over the limits prescribed under the Takeover Code will not be required to make a mandatory public offer.

What are the steps for the issue of Preference Shares?

• Articles of Association of the company get checked to ensure that the necessary authority/power is there to issue preference shares. If there is no such authority/power, then the company has to take steps for an alteration of its articles of association following the provision of section 14 of the Companies Act, 2013 to provide an issue of preference shares.
• Notice of Board Meeting of the Board of Directors to be issued as per the provisions of Section 173(3)^[1] of the Companies Act, 2013.

Hold Board Meeting

Hold and convene Board Meeting for the following purpose:

• To seek permission to issue preference shares.
• Issue of Preference shares by an ordinary Resolution
• To get the approval of shareholders for a date, time and venue should be fixed for holding the Extra-Ordinary General Meeting ( EGM).
• To approve the notice of Extraordinary General Meeting along with an explanatory statement.
• To issue a notice of Extraordinary General Meeting any Director or secretary to be authorized.

What Content is contained in Resolution?

Passing of particular Resolution in respect of rights of the preference shareholders regarding payment of dividend or capital compared to equity shareholders are:

1. In case of winding up the share of preference shareholders will be considered for the surplus fund.
2. Right of participation of preference shareholders in winding up.
3. Payment of cumulative or non-cumulative dividends.
4. Converting preference shares into equity shares.
5. Voting rights.
6. The redemption of preference shares.

Hold an Extraordinary Board Meeting

• As per Section 103 quorum of the meeting should be checked

• presenting the offer letter.
• Special Resolution to be passed for the issue of preference shares.

• For the Resolution of shares under section 179(3) e Form, MGT 14 is to be filed with the registrar.

Circulate letter of offer

• Sending the letter of offer to the shareholders via registered post, speed post or through electronic mode at least three days before the opening of the issue.
• Offer to be open for a time limit of not less than 15 days and not more than 30 days.

• File e-Form- MGT-14 with the registrar within 30 days of passing the Resolution.
• Acceptance of renunciations or rejection of rights from members to whom the offer has been sent & also from persons in whose favor right renounced.

• As per Section -56(4)(b) Share certificate to be issued in form SH-1 within 2 months from the date of allotment of shares.

What are the important points to be noted while allotment of preference shares?

While allotment of Preference shares following points are to be noted:

Allotment to be made within 60 days of receiving of application money, failure of which resulting in deposits as per Deposit Rules.

• Issue share certificate under form-SH-1
• As per Form no. MGT-1 under section 88 and the Companies Management and Administration) Rules, 2014 make entry of allotment of preference shares in the register of members.
• Make entry of allotment of preference share in the register of members as maintained in form no. MGT-1 under Section-88 and the Companies (Management and Administration) Rules, 2014.

Why Preference Shares are exempt from Public Offer rule?

The annexation of preference shares does not have the same obligations as that of the acquisition of shares under the Takeover Code.

• According to the Exemption under Regulation 10(1) (h) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 the acquisition of voting rights as per section 87(2) of the Companies Act, 1956  preference shares is exempted from open offer rule of the Takeover Code.
• Even the 1977 code did not include the definition of preference shares under the code. No voting rights are accorded to equity shareholders in case of preference shares to the public companies.
• Citing the TRAC report, the voting rights that accrue on preference shares in proportion to the paid-up preference share capital, when dividend remains unpaid beyond the periods set out in Section 87(2), would not attract an obligation to make an open offer.

However, section 87(2) of the Companies Act, 1956 is now not applicable and is replaced by Section 47(2) of the Companies Act, 2013. This change has been mentioned under the amended regulations in 2018.

Conclusion

As per Section 55 of the Companies Act, a company can issue redeemable preference shares. Irredeemable preference shares are not allowed to be issued. Hence public offer is not mandatory while granting preference shares to shareholders. No voting rights in case of preference shares differ from other shares. As the name suggests, preference shareholders are preferred before all other shareholders even during winding up of the company. Preference shareholders get the money first, and the accounts of preference shareholders are settled before the ordinary shareholders.

Also read: Rights of Preference Shareholders under the Insolvency and Bankruptcy Code, 2016