In a company, there are two types of funding sources through shares where one is Equity and another is Preference. Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before paying dividends to equity shareholders.

If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders. Most preference shares have a fixed dividend, while common stocks generally do not. 

Preferred stock shareholders also typically do not hold any voting rights but get privilege on the closure of the company, also common shareholders usually do have the power to vote in the meeting of Members. 

(I) Procedure for Issue of Preference Shares 

1. Check whether the AOA of the company allows the same. 

2. Hold a meeting of Directors to Pass board resolution for issuing Preference Shares and to call a Meeting of Members (EGM/AGM).

3. File the board resolution in MGT -14 form with the registrar within 30 days of passing of resolution (exempted for private companies) 

4. Hold meetings of Members and Pass Special resolutions the Meeting 

5. e-Form MGT-14 for filing resolution with the registrar within 30 days of passing of resolution along with (a) Special resolution along with explanatory statement (b) consent to shorter notice (if applicable) 

6. Post approval of Members in the meeting issue preference shares by giving proper notice and hold a meeting for allotment of Preference Shares by directors for their approval.

7. e-Form MGT-14 for filing of Board resolution for an allotment with registrar within 30 days of passing of resolution (exempted for private companies) 

8. e-Form PAS-3 for return of allotment within 30 days (15days in case of Private Placement/ Preferential Allotment) of date of allotment along with: 

(a) List of allottees 

(b) Valuation report 

(c) Board resolution

(d) Special resolution along with an explanatory statement 

(e) Record of private placement offers in form PAS-5 (if applicable) 

(f) Copy of contract/complete particulars of contract duly stamped is mandatory to attach in case securities are issued other than cash 

9. Pass Entry in register of members in Form MGT-1 within 7 days of allotment 

10. Refer additional compliances for allotment by way of private placement or preferential allotment procedure(s) as referred u/s 42 or 62 as the case may be 

11. Issue of share certificates as per Section 46 & 56 i.e. within sixty days of allotment of Preference Shares.

12. Every unlisted Public Company shall issue its securities in dematerialized form. (For compliances of dematerialization please refer to Quick Reference under Section 42) 

13. Stamp duty adjudication as per provisions & rates of Stamp Act of the relevant state 

14. Ensure additional FEMA compliances in case of Foreign remittance from Preference Shareholders.

(II) Procedure for Redemption of preference shares 

1. Before anything else Check that A company shall issue preference shares which are liable to be redeemed within a period not exceeding 20 years except that for infrastructure projects subject to compliance with the specified conditions. 

2. Check the terms and conditions of the issuance as applicable for redemption. 

3. Hold Board Meeting to pass Board resolution for authorizing redemption of preference shares out of 

(a) Profits of the company or 

(b) proceed of fresh issue of shares made for the purpose of redemption

4.File e-Form SH-7 for notice to the registrar for alteration of share capital along with board resolution 

5. Entry in register of members in Form MGT-1 entry in the register within 7 days of redemption 

6. Ensure additional compliance with the conditions as per provision of section and rules thereon 

(III) Procedure for Application to NCLT for issuing further redeemable preference shares, when the Company is not in a position to redeem any preference shares or to pay a dividend, if any, on such shares in accordance with the terms of issue. 

1. Application in form NCLT-1 along with Form NCLT-2 along with the following attachments: 

(a) Copy of the Memorandum and Articles of association. 

(b) Documents showing the terms of issue of the existing preference shares

(c) Copy of the Board Resolution and resolution of the general meeting for the issue of further redeemable preference shares. 

(d) Copy of the latest audited balance sheet with the profit and loss account of the company with the auditor’s report and director’s report. 

(e) Affidavit verifying the petition. 

(f) Bank draft evidencing payment of application fee. 

(g) Memorandum of appearance with copy of the Board Resolution or the executed Vakalatnama, as the case may be. 

2. On receipt of Order form NCLT, the Company shall file a certified copy in Form INC-28 within 30 days. The article has been prepared considering the relevant Guidelines/ Circulars/ Notifications/ Provisions of the Companies Act, 2013, the rules made thereunder & The Companies Act, 2013. 

Readers are requested to cross-check the provisions before acting upon the same. The author will not be liable for any damages or penalties caused.

References

https://www.investopedia.com/terms/p/preference-shares.asp