ISSUE AND REDEMPTION OF PREFERENCE SHARES

Section 80 of the Companies Act enables a company limited by shares to issue redeemable preference shares, if so authorised by the articles of association of the company. Preference shares can be either cumulative or non-cumulative. A Redeemable preference share is one of the types of preference shares. To redeem means to buy or pay off; clear by payment; to buy-back. These shares are issued subject to the condition that they will or may be redeemed, that is, bought back (at the option of the shareholder or the company) by the company.

Redemption of redeemable preference shares does not amount to reduction of share capital. A company can issue redeemable preference shares with a tenure of not exceeding 20 years. No company can issue irredeemable preference shares. The articles must authorize the company to issue redeemable preference shares. If the articles do not contain a regulation authorising the issue of such shares, then for issuing such shares, articles must be amended to insert therein a provision authorising the company to issue such shares.

The redemption of redeemable preference shares may be effected on such terms and in such manner as is provided in the articles of the company. If the articles do not contain any provisions in this regard, the terms and conditions for redemption may be inserted in the articles by amending the articles by a special resolution. The following conditions must be fulfilled for redemption of redeemable preference shares:

— The shares to be redeemed must be fully paid up;

— Redemption can be effected only out of profits which would otherwise have been available for dividend, or out of the proceeds of a fresh issue of shares made for the purpose of redemption;

— The premium payable, if any, on the redemption shall be provided for out of the profits of the company or out of the company’s securities premium account. Such provision shall be made before the shares are redeemed;

— If the redemption is out of the proceeds of a fresh issue of shares, the issue shall have been made specifically or inter-alia for the purpose of the redemption;

— If the redemption is out of distributable profits, the profits equivalent to the nominal amount of the shares redeemed must be transferred to capital redemption reserve account.

Unless the terms of the issue provide for conversion of preference shares into equity shares, the preference shares have to be redeemed only in cash.

The sanction of the court under section 100 of the Act would be necessary where preference shares are to be redeemed out of capital redemption reserve account created out of the profits of the company.

Two independent procedures are available to a company for redemption of preference shares. It may redeem the shares by following the procedure laid down under section 80 of the Act which is a special provision meant for redemption of preference shares or it may take recourse to the general provision under section 100 of the Act which is applicable for reduction of any capital including preference capital, in any manner. [Birla Global Finance, in re (2005) 126 Comp Cas 647 (Bom)]