Procedure for Redemption of Preference Shares under Companies Act 2013

INTRODUCTION

Redemption of Preference Shares basically means the repayment to the shareholders of preference share capital what they have invested into the Company. 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 and the preference shares may be redeemed

  • at a fixed time or on the happening of a particular event
  • any time at the company’s option or
  • any time at the shareholder’s option.

MANDATORY REQUIREMENTS

  • These shares shall 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.
  • These shares shall be redeemed only when they are fully paid.
  • Where such shares are redeemed out of the profits of the company, then a sum equal to the nominal amount of the shares to be redeemed shall be transferred out of such profits to a reserve called the Capital Redemption Reserve Account.
  • In case of such class of companies whose financial statement comply with the accounting standards, the premium payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed. And for every other company, such premium payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.
  • The premium payable on redemption of any preference shares issued on or before the commencement of this Act, shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.

FOLLOWING PROCEDURE IS TO BE FOLLOWED

  1. Prior Intimation about Board Meeting to the Stock Exchange [Regulation 50 of the SEBI (LODR), 2015]
    Companies which have listed their Non-convertible preference shares on the stock exchange shall give prior intimation to the Stock Exchange about the meeting of the Board of Directors at least 11 working days before the date on and from which the redemption amount of redeemable preference shares shall be payable.
  2. Convene a Meeting of Board of Directors [As per section 173 & SS-1]
    • Issue Notice of Board Meeting to all the Directors of Company at their addresses registered with the Company, at least 7 days before the date of Board Meeting. A shorter notice can be issued in case of urgent business.
    • Attach Agenda, Notes to Agenda and Draft Resolution with the Notice.
    • Hold a meeting of Board of Directors of the Company and pass the necessary Board Resolution
      • to approve redemption of redeemable preference shares out of profits of the company or out of the proceeds of fresh issue of shares.
      • to approve transfer of an amount equal to the nominal amount of shares to be redeemed to the Capital Redemption Reserve, if shares are proposed to be redeemed out of the profits of the company.
      • to approve the issue of fresh shares up to the nominal amount of the shares to be redeemed to the existing shareholders, if the redemption is to be made out of the fresh issue of shares.
      • to decide the record date pursuant to Regulation 60 of the SEBI (LODR), 2015, if company has listed its non-convertible preference shares on the stock exchange
      • to authorize CS or CFO or any director of the company to file the notice for redemption of preference shares with ROC.
      • Company which has listed its non-convertible preference shares on the stock exchange shall promptly inform to the stock exchange about any action taken which shall result in redemption of any non-convertible preference shares. [Regulation 51 of the SEBI (LODR) Regulations, 2015]
      • Company which has listed its non-convertible preference shares on the stock exchange shall give an advance notice of at least 7 working days, excluding the date of intimation and the record date to the stock exchange of the record date. [Regulation 60 of the SEBI (LODR) Regulations, 2015]
      • Prepare and Circulate Draft Minutes within 15 days from the conclusion of the Board Meeting, by Hand/Speed Post/Registered Post/Courier/E-mail to all the Directors for their comments.
  3. Payment of Redemption Amount
    Company shall make the payment of the redemption amount and the premium amount (if any) to the redeemable preference shareholders.
  4. Relevant Entries in the Register of Members
    Company shall make necessary entries in the Register of Members in Form MGT-1 within 7 days from the date of Board Meeting in which the redemption was approved.
  5. Corporate Actions
    Where the Company has allotted the redeemable preference shares in demat format, shall file necessary corporate action for the debit of preference shares from the account of shareholders.
  6. File Notice for Redemption of Preference Shares
    Company shall file a notice for the redemption of preference shares with ROC in Form SH-7 within 30 days from the date of such redemption along with the copy of Board Resolution authorizing redemption of redeemable preference shares.
  7. Transfer of Amount to Capital Redemption Reserve Account
    Where the company has redeemed the preference shares out of the profits of the company then a sum equal to nominal amount of the redeemed preference shares shall be transferred to the Capital Redemption Reserve Account (CRR).
Some Thoughts:

1. Interestingly, Section 55 and Rule 9 do not talk about what kind of resolution is required for Redemption of Preference Shares. So, as per general powers of Board as prescribed under Section 179(1), Board Resolution is passed for Redemption of Preference Shares.

Again a question comes into the thought, that do we have to mention the reference of sec. 179(1) to the resolution, answer is no, reference is not required. Since it is general in nature.

2. Sec. 55(2) provides that redemption of preference shares can be done either from the profits of the Company or out of proceeds from a fresh issue of shares. 

Many articles online says that redemption can be done by using combination of both of the above provided options. But if one look at the language of the act, the word or is used  and also both word is also not used.

Therefore, we have to use either of the source and not both.


This blog is authored by Company Secretary Ronak Gupta. He is author of many blogs and runs many websites and youtube channels. His work is dedicated to corporate laws, legal, secretarial, professional services and also in strategy formulations for corporates. Mail him at: csronakgupta23@gmail.com or call at :9910226715

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