Section 55 Of Companies Act 2013: Issue And Redemption Of Preference Shares
Updated: Oct 14, 2022
What are Preference Shares?
There are 2 types of shares in any company first is Equity shares or Common Stock and the second is Preference shares of Preferred stock. Equity shareholders are considered as real owners of the Company as they have voting rights in a company while preference shareholders don’t have voting rights on all resolutions in ordinary circumstances.
However, where the dividend in respect of preference shares has not been paid for a year or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
Preference shareholders are given priority in payment of dividends and dividends in case of winding up. The rate of dividend on equity shares fluctuates every year as it depends on the amount of profit available to the company. On the other hand, Preference Shares carry either a fixed rate or a fixed amount as a dividend.
What is Redemption of Preference Shares?
Redemption is the process of repaying an obligation, at prearranged amounts and timings. It is a contract giving the right to redeem preference shares within or at the end of a given period at an agreed price. These shares are issued on the terms that shareholders will at a future date be repaid the amount which they invested in the company (along with frequent payment of a specified amount as return on investment during the tenure of the preference shares).
The redemption date is the maturity date, which specifies when repayment takes place and is usually printed on the preference share certificate. Through the process of redemption, a company can also adjust its financial structure, for example, by eliminating preference shares and replacing those with other securities if future growth of the company makes such change advantageous.
What is Section 55 of Companies Act 2013?
Section 55.Issue and redemption of preference shares.
(1) No company limited by shares shall, after the commencement of this Act, issue any irredeemable preference shares.
(2) A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed:
Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed: on an annual basis at the option of such preferential shareholders:
Provided further that—
(a) no such shares shall be redeemed except 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 such redemption;
(b) no such shares shall be redeemed unless they are fully paid;
(c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and
(d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the Accounting Standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company before the shares are redeemed: