Procedures under Companies Act, 2013

Redemption of Preference shares by a Company Limited by Shares

Key Considerations:

a) Company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act. The preference shares may be redeemed:

  1. at a fixed time or on the happening of a particular event;
  2. any time at the companys option; or
  3. any time at the shareholders option. [Rule 9(6) of the Companies (Share Capital and Debentures) Rules, 2014]

b)In case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed. [Section 55(2)(d)]

c)If case does not fall under above point, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the companys securities premium account, before such shares are redeemed. [Section 55(2)(d)]

The following procedure is to be followed for redemption of preference shares by a company limited by shares under Section 55 and Rule No. 9 of the Companies (Share Capital and Debentures) Rules, 2014-

  1. Verify the following points before taking decision of redeeming redeemable preference shares:-
  1. They must be redeemed only out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption;
  2. They must be fully paid-up;
  3. If shares are redeemed out of distributable profits of the Company, then before such redemption, transfer a sum equal to the nominal amount of shares to be redeemed to a reserve fund called the Capital Redemption Reserve Account from the distributable profits of the Company and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and
  4. The premium, if any, payable on redemption of any preference shares must be provided only out of the profits of the company in case of prescribed class of companies and in case of other companies, out of the profits of the Company or out of the companys securities premium account, before such shares are redeemed. [Section 55(2)]
  1. Issue not less than 7 days notice and agenda of Board meeting, or a shorter notice and agenda in case of urgent business, in writing to every director of the company at his address registered with the company and call a Board Meeting to consider the proposal for redemption of preference shares. .
  1. Hold a meeting of the Board of Directors-

  1. To pass the necessary Board Resolution for approving the redemption of preference shares
    1. Premium amount payable on redemption, if any and the mode of payment, i.e whether out of profits or securities premium account as applicable.
    2. Mode of redemption- profits of the company/ fresh issue of shares.
    3. Date of redemption, i.e date of making payment of redemption amount.
    4. Approving the amount to be transferred to Capital Redemption Reserve Account from distributable profits, if shares are redeemed out of distributable profits of the Company.
  2. To authorize Company Secretary or any Director to sign and file the relevant form with Registrar of Companies and to do such acts, deeds and things as may be necessary to give effect to the Boards decision
  1. Prepare and circulate draft minutes within 15 days from the date of the conclusion of the Board Meeting, by hand/speed post/registered post/courier/e-mail to all the Directors for their comments. Also follow the procedure prescribed for preparing, circulation, signing and compiling of Board Minutes.(Secretarial Standards-1 )
  1. Transfer the nominal amount of shares to be redeemed to a reserve fund called the Capital Redemption Reserve Account from the distributable profits of the Company, if if shares are redeemed out of distributable profits of the Company.
  1. Make the payment of the redemption amount and the premium amount, if any to the preference shareholder.
  1. File the notice of redemption of preference shares with the Registrar in Form No. SH-7 under Section 64 of the Act along with the fee as specified in Companies (Registration of offices and Fees) Rules, 2014 within 30 days from the date of redemption of preference shares along with the following attachments . [Section 64 and Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014]
  1. Make necessary entries regarding redemption in the Register of Members and Register of Directors and key managerial personnel and their shareholding, if applicable. (Rule 5(4) of Companies (Share Capital and Debentures) Rules, 2014

Notes:

  • A company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum ten percent of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders. [Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014]
  • If a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue, it may, with the consent of the holders of 3/4th in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares. [Section 55(3)]
  • On the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed. [Section 55(3)]
  • The Tribunal shall, while giving approval, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares. [Proviso to Section 55(3)]
  • The issue of further redeemable preference shares or the redemption of preference shares shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company. [Explanation to Section 55(3)]
  • The capital redemption reserve account may, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares. [Section 55(4)]

Procedure Authors

ACS Divya Jain
ACS Palak Jain
ACS Ankita Jain
ACS Sugandh Jain
ACS Mansi Kapor
ACS Bhawna Sharma


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