Preference Shares in Private Limited Company

Preference shares are a class of shares that entitles the holder to a fixed dividend payment. The payment of preference share dividends takes priority over that of ordinary share dividends. As per Companies Act, 2013, an Indian Private Limited Company or Limited Company can issue preference shares, if authorized by the articles of association of the company. All preference shares issued by a company in India must be redeemable and should be redeemed within a period of 20 years from the date of its issue. In this article, we look at the different types of preference shares and procedure for issuing preference shares in a private limited company.

Preference Shares

To quality as a preference share issue, the share must fulfill both of the following conditions listed in the Companies Act, 2013:

The share carriers or will carry a preferential right to be paid dividend of a fixed amount or at a fixed rate which may either be free of or subject to income tax; AND
The share carries or will carry a preferential right in case of winding up to repayment of capital paid up or deemed to have been paid up.

Types of Preference Shares

Preference shares can be classified into the following types based on the rights:

Cumulative Preference Shares

Holders of cumulative preference shares are entitled to receive the divided for a year in which dividends could not be paid due to losses or inadequate profit in the subsequent year(s) whenever there are sufficient profits.

Non-Cumulative Preference Shares

Holders of non-cumulative preference shares are NOT entitled to receive the dividend for a year in which dividends could not be paid in the subsequent year(s). Therefore, for non-cumulative preference shares, the right to dividend for a year cannot be carried over in subsequent years.

Participating Preference Shares

Participating preference shares are eligible to receive surplus profit or dividends in the company, in addition to being entitled for fixed dividend.

Non-participating Preference Shares

Non-participating preference shares are those shares that are not entitled to participate in surplus profits of the company. Non-participating preference shares are only entitled to fixed dividend payments.

Redeemable Preference Shares

Redeemable preference shares are those shares that would be redeemed by the company within a period of 20 years from the date of issue.

Irredeemable Preference Shares

Irredeemable preference shares are those preference shares that would NOT be redeemed by a company. Companies in India are not allowed to issue irredeemable preference shares.

Convertible Preference Shares

Convertible preference shares can be converted into equity shares of the company as per the terms and conditions of their issue.

Non-convertible Preference Shares

Non-convertible preference shares are not convertible into equity shares of the company but still have preferential rights to payment of capital in the event of winding up of the company.

Issuing Preference Shares in a Private Limited Company

A private limited company or limited company having share capital may issue preference shares, if authorized by the articles of association of the company, subject to the following conditions:

The issue of preference shares by the company is authorized by passing a special resolution in a general meeting of the company; AND
The company, at the time of such issue of preference shares, has not defaulted in the redemption of preference shares issued either before or after the commencement or in payment of dividend due on any preference shares.

In addition to the above, the company issuing preference shares must set out in the articles of association of the company, the following regulations:

Priority of preference shares with respect to dividend payment and repayment of capital over equity shares;
Participation in surplus funds of the company;
Participation in surplus assets and profits, on winding up of the company;
Payment of dividend on cumulative or non-cumulative basis;
Conversion of preference shares into equity shares;
Voting rights of the preference shares;
Redemption of preference shares;

Format of Resolution for Issuing Preference Shares

RESOLVED THAT: the Board of Directors of the company be and are hereby authorized to offer the (Number of Shares) new (Coupon Rate %) redeemable cumulative second preference shares of (Share Face Value) each to the existing shareholders of equity shares of the company as on the (Date, Month, Year) in accordance with the terms and conditions contained in clauses (a), (b), (c) and (d) of sub-section (1) of section 62 of the Companies Act, 2013, and if the shares so offered are not being taken up by the existing shareholders of equity shares, to provide an opportunity to the public by a prospectus in such manner and on such terms and conditions as the Board may determine;

RESOLVED THAT: the Board of Directors be and they are hereby authorised to take all necessary steps for implementation of the above proposals.