• Jan 22,2025

Companies Act Section 55

Companies Act Section 55: Issue and Redemption of Preference Shares

1. Introduction  

Section 55 of the Companies Act governs the issue and redemption of preference shares by companies. Preference shares are a class of shares that offer holders priority in receiving dividends and capital repayment over equity shareholders, though they typically have limited voting rights. This section specifies the conditions under which companies may issue and redeem preference shares to ensure that the interests of shareholders and the company are balanced. 

This provision sets out rules for the issuance of redeemable preference shares, the prohibition on irredeemable preference shares, and the establishment of a Capital Redemption Reserve. Additionally, it provides mechanisms for companies that are unable to redeem their preference shares on time.

2. Prohibition on Issuance of Irredeemable Preference Shares (Subsection 1)  

After the commencement of the Companies Act, companies limited by shares are prohibited from issuing irredeemable preference shares.  

Irredeemable shares are those that cannot be redeemed or bought back by the company at any point, which could tie the company to perpetual obligations toward preference shareholders.

The prohibition ensures that companies remain flexible in managing their capital and financial obligations.

3. Conditions for Issuing Redeemable Preference Shares (Subsection 2)  

A company may issue redeemable preference shares, but only under specific conditions outlined below:

(a) Authorization by Articles of Association  

The company's articles of association must permit the issuance of redeemable preference shares. The articles are the company’s internal rules, and any issue of such shares without authorization would be invalid.

(b) Redemption Period  

Redeemable preference shares must be redeemed within a maximum period of 20 years from the date of their issue. However, there is one exception for infrastructure projects, as discussed below.

(c) Exception for Infrastructure Projects  

Companies involved in infrastructure projects may issue preference shares with a redemption period exceeding 20 years, provided that:

A certain percentage of the preference shares is redeemed on an annual basis.

This redemption occurs at the option of the preference shareholders to maintain fairness.

The term infrastructure projects refers to projects defined under Schedule VI of the Companies Act, which typically include sectors such as transport, energy, and urban development.

4. Requirements for Redemption of Preference Shares  

To redeem preference shares, companies must comply with the following provisions:

(a) Redemption from Profits or Fresh Issue of Shares  

Preference shares can only be redeemed out of the company’s profits, which would otherwise be available for distributing dividends.  

Alternatively, redemption can be funded through the proceeds of a fresh issue of shares.

This ensures that the company’s capital base is maintained, either by generating profits or by issuing new shares to raise funds for redemption.

(b) Fully Paid Shares Only  

Only fully paid-up preference shares can be redeemed. This ensures that no liability remains on the shares being redeemed.

(c) Transfer to Capital Redemption Reserve Account  

When redemption occurs out of the company’s profits, the company must transfer an amount equal to the nominal value of the redeemed shares to a Capital Redemption Reserve (CRR) Account. 

The CRR ensures that the company’s capital is not reduced after the redemption.  

The provisions governing reduction of share capital under the Companies Act apply to the CRR as if it were paid-up capital.

5. Provision for Redemption Premium (Subsection 2(d))  

If any premium is payable on the redemption of preference shares, the source of such premium will vary based on the type of company and its financial reporting standards:

For Prescribed Companies Complying with Accounting Standards:  

The redemption premium must be provided from the company’s profits before redeeming the shares.  

For Other Companies:  

The redemption premium may be paid either from the company’s profits or from the securities premium account.

Additionally, for pre-existing preference shares (issued before the commencement of the Act), the premium can be drawn from the securities premium account or profits.

6. Procedure for Unredeemed Preference Shares (Subsection 3)  

In certain situations, a company may face financial difficulties that prevent it from redeeming its preference shares or paying dividends as per the terms of issue. In such cases, the company can take the following steps:

Consent from Preference Shareholders:  

The company must obtain the consent of shareholders representing three-fourths in value of the preference shares.

Approval from Tribunal:  

The company must also secure the approval of the Tribunal by submitting a petition. If approved, the company may issue further redeemable preference shares equivalent to the amount due (including dividends) on the unredeemed shares.

Deemed Redemption of Original Shares:  

Upon issuing the new redeemable preference shares, the unredeemed preference shares will be treated as redeemed.

Redemption of Dissenting Shareholders:  

The Tribunal may require the immediate redemption of shares held by shareholders who did not consent to the issuance of further redeemable preference shares.

Clarification on Share Capital Impact  

The issuance of new redeemable preference shares or redemption under these provisions does not constitute an increase or reduction in the company’s share capital. This ensures that the company’s financial structure remains unaffected.

7. Use of Capital Redemption Reserve (Subsection 4)  

The Capital Redemption Reserve (CRR) Account can also be utilized for specific purposes. A company may use the balance in the CRR to issue fully paid bonus shares to its shareholders.  

This allows the company to convert the CRR into share capital, rewarding existing shareholders without affecting its cash reserves.

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