- Introduction
This Article provides an overview of the statutory framework regulating redeemable preference shares under the Companies Act, 2013 (“Act”), read with the Companies (Share Capital and Debentures) Rules, 2014 (“Rules”). The primary governing provision is Section 55 of the Act.
- Prohibition on Irredeemable Preference Shares
Under Section 55(1), a company limited by shares is expressly prohibited from issuing irredeemable preference shares. Only redeemable preference shares may be issued.
- Maximum Redemption Period
In accordance with Section 55(2), redeemable preference shares must be redeemed within a period not exceeding 20 years from the date of their issue.
Exception — Infrastructure Companies:
Under Rule 10(3), companies engaged in infrastructure projects may issue preference shares redeemable up to 30 years, subject to:
- Minimum 10% redemption per year commencing from the 21st year, and
- Appropriate disclosure of redemption terms in the offer document.
- Permissible Sources of Redemption
Under Section 55(2)(b), a company may redeem preference shares only from:
a. Profits available for dividend, or
b. The proceeds of a fresh issue of shares (equity or preference).
The Act does not permit redemption using borrowed funds or non-profit general cash balances.
- Requirement That Shares Be Fully Paid
Under Section 55(2)(a), redeemable preference shares must be fully paid-up prior to redemption. Partly paid shares cannot be redeemed.
- Capital Redemption Reserve (CRR)
Where redemption is effected out of profits, Section 55(2)(c) requires the company to transfer an amount equal to the nominal value of the redeemed shares to a Capital Redemption Reserve (CRR).
Under Section 55(3), CRR may be utilised only for issuing fully paid bonus shares.
Any premium on redemption must be provided out of:
- the Securities Premium Account, or
- the company’s profits
(Section 52(2)).
- Requirement of Authorisation in the Articles of Association
In addition to statutory requirements under Section 55, the company’s Articles of Association (AOA) must expressly authorise the issuance of preference shares, including redeemable preference shares. If the AOA does not contain such a provision, the company must first alter its AOA by passing a special resolution under Section 14 before proceeding with the issuance. Thus, the Companies Act provides the legal framework, while the AOA provides the company-specific enabling authority.
- Terms of Issue
Under Rule 9 of the Rules, the terms of issue of preference shares must be clearly stated and authorised by AoA . These include:
- the rate of dividend,
- tenure and redemption schedule,
- cumulative or non-cumulative nature, and
- conversion rights, where applicable.
All terms must be consistent with Section 55 and the Rules. Further, the issuance of such shares should be authorised by passing a special resolution in the general meeting of the company.
- Rights and Voting of Preference Shareholders
Section 43(b) defines preference shareholders’ preferential rights regarding dividend and repayment.
Under Section 47(2):
- Preference shareholders generally do not have voting rights, except:
- on matters directly affecting their rights; or
- when their dividend remains unpaid for two consecutive years, in which case they acquire voting rights on all matters until the arrears are cleared.
Conclusion
The legislation ( Companies Act, 2013) provides a comprehensive and protective framework for redeemable preference shares, mandating timely redemption, disciplined funding methods, and capital protection via the CRR mechanism. The AOA must independently authorise such issuance, ensuring internal corporate approval alongside statutory compliance.