Rights Issue of Preference Shares: Key Compliance Under Companies Act, 2013

Issuance of Preference Shares as Right Issue (Under Section 62(1)(a) read with Section 55 of the Companies Act, 2013)

Summary: Under the Companies Act, 2013, companies are permitted to issue preference shares in addition to equity shares. Preference shares offer priority in dividends and capital repayment during winding up, though they carry limited voting rights. Section 62(1)(a) governs rights issues, allowing companies to offer shares—equity or preference—to existing equity shareholders proportionately. Section 55 specifically regulates the issue of preference shares, permitting only redeemable ones, with a maximum tenure of 20 years (30 for infrastructure projects). Issuance of preference shares via rights issue requires shareholder approval through a special resolution and compliance with Articles of Association. The offer must be proportionate to equity shareholding, and only equity shareholders are eligible to receive it. A valuation report isn’t mandatory but is advisable for transparency, especially in cases involving share premiums or complex terms.

The process includes board and general meetings to approve the issuance, drafting and sending offer letters, receiving applications and subscription money, allotting shares, filing form PAS-3 with the ROC, and issuing share certificates within statutory timelines. Forms PAS-4 and PAS-5 and provisions of Section 42 (private placement) are not applicable to rights issues. There is no restriction on the frequency or overlap of rights offers during a financial year. Subscription money can be received in cash and utilized upon receipt without waiting for allotment. No separate bank account is required, and shares may be issued at face value. Compliance with terms like dividend rate, redemption schedule, and disclosure in resolutions is essential. This method enables capital raising without altering control or opting for private placement, provided procedural safeguards are observed.

Introduction

Advantages of preference shares: The main advantage of preference shares over equity shares is that

√ They enjoy a preferential right to dividend and

√ Repayment of capital in case of winding-up of the company.

Disadvantages of preference shares:

The main drawback of preference shares is that they carry limited voting rights. Therefore, the control of a company is in the hands of its equity shareholders.

♦ Legal Provisions:

• Section 62(1)(a): Governs Rights Issue to existing Shareholders.
• Section 55: Governs issue of Preference Shares (only redeemable).
• Rules 9 of Companies (Share Capital and Debentures) Rules, 2014.

I. Can a company issue preference shares under rights issue?

Yes, preference shares can be issued under Section 62(1)(a) of the Companies Act, 2013 — as a rights issue, but subject to compliance with Section 55 as well.

What Section 62(1)(a) Says:

Where at any time, a company proposes to increase its subscribed capital by issue of further shares, such shares shall be offered to existing equity shareholders in proportion to the paid-up share capital on those shares.

This provision does not restrict the company to issuing only equity shares — it says “further shares”, which includes preference shares (subject to Articles and Section 55).

II. Whether existing preference shareholders can get right issue of new preference shares?

As per Section 62(1)(a), further issue of shares allowed only to holders of equity shares of the Company.

Thus, Section 62 applies when new equity shares and preference shares are to be issued on right basis but such shares are to be offered only to equity share holders.

III. Is private placement (Section 42) applicable in case of rights issue of preference shares?

No. If shares are issued to existing shareholders proportionately, it’s a rights issue, not a private placement. Therefore, Section 42 is not applicable.

IV. Who can be offered preference shares on a rights basis?

Typically, the offer is made to existing equity shareholders, as they are members holding voting capital. The offer must be proportionate to their existing shareholding, unless renunciation is permitted.

V. Is the valuation report required for rights issue of preference shares?

Not mandatory, but advisable as a best practice—especially when there are different classes of shares or complex rights attached, to ensure fairness and avoid shareholder disputes.

VI. Are Form PAS-4 and PAS-5 required for rights issue of preference shares?

No. These are required only for private placement under Section 42. Rights issue does not attract Section 42, so PAS-4 and PAS-5 are not applicable.

Legal Interpretation & Practice:

• The Act does not prohibit issuing preference shares under rights issue.
• It is well accepted in practice that preference shares can be issued to existing equity shareholders on rights basis under Section 62(1)(a).
• However, they must comply with:
  • √ Section 55 (Only redeemable preference shares, max tenure 20 years, etc.)
  • √ Articles of Association should authorize the issue.
  • √ Offer must be made in proportion to existing shareholding.

Pre Issue Checklist

INITIAL STEPS:

a) The issue of preference shares should be authorised by the shareholders by passing a special resolution in the general meeting of the company.

b) You should ensure that the share capital of the company is bifurcated into equity and preference share capital.

c) You shall review whether the articles of association authorise the issue of preference shares.

d) The company needs to ensure that there are no subsisting defaults in relation to the payment of dividends due on any existing preference shares at the time of issue of proposed preference shares.

e) The company also needs to ensure that there are no subsisting defaults in relation to the redemption of existing preference shares at the time of issue of proposed preference shares.

f) capital, then first increase authorized share capital of company.

g) To decide Cut-off date for Eligible Shareholders for Right Issue of Shares.

h) To Draft Letter of Offer.

STEP- I- Holding of Board Meeting

i. To pass a resolution for approving the resolution for the issue of preference shares of the company to the existing equity share holders in the proportionate right.

ii. Approve the draft offer letter

iii. To issue Notice for holding of Extra Ordinary General Meeting of Shareholders.

STEP- II- Holding of Extra Ordinary General Meeting:

iv. Company shall pass Special resolution for issuance of Preference Shares u/s 55 by approval of offer letter.

v. File e-form MGT-14 within 30 days of passing Special Resolution with ROC.

vi. Issuance of preference shares, Explanatory Statement should mention following information: (Rule 9 of Companies (Share Capital and Debentures) Rules, 2014)

• Size of the issue and number of preference shares to be issued and nominal value of each share;
• Nature of such shares i.e. cumulative or non – cumulative, participating or non – participating, convertible or non – convertible.
• Objectives of the issue;
• Manner of issue of shares;
• Price at which such shares are proposed to be issued;
• Basis on which the price has been arrived at;
• Terms of issue, including terms and rate of dividend on each share, etc.; Terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion;
• Manner and modes of redemption;
• Current shareholding pattern of the company;
• Expected dilution in equity share capital upon conversion of preference shares.

vii. Information in Special Resolution: The special resolution presented in the general meeting of the shareholders shall consist of the following information:

• The rights of the preference shareholders in relation to repayment of capital and payment of dividends as compared to the equity shareholders.
• The share of the preference shareholders in the surplus funds during the course of winding up of the company.
• The conversion of the preference shares to equity shares.
• The payment of dividends, whether on a non-cumulative or cumulative basis.
• The right of the preference shareholders in the surplus profits and assets of the company.
• The redemption of preference shares.
• The voting rights of the preference shareholders.

STEP- III- Issuance of Offer letter:

viii. Director shall issue offer letters to existing Equity Share holders.

ix. Receive the acceptance/ rejection of offer from shareholders within time prescribed in Letter of Offer.

x. Receive the application money from the shareholders accepting the offer within time prescribed in Letter of Offer.

xi. If company doesn’t receive subscription of all offered shares, company can renounce shares to outsiders after expiry of offer period.

STEP – To Call Meeting of Board of Directors

Within 60 days of receipt of letter of offer company have to allot shares by holding of Board Meeting

xii. Issue Notice of Board Meeting to all the directors of the company at least 7 days before the date of Board Meeting.

i. Attach a list of people who have subscribed for the shares.

STEP – To Hold Meeting of Board of Directors

xiii. Present List of Allottees before the Board Members.

xiv. Pass Board Resolution for allotment of shares (within 60 days of receiving of money).

xv. Pass Board Resolution for Issue of Share Certificates and authorization of directors for signing of Share Certificates

STEP- To File form with ROC:

xvi. To File PAS-3 with concerned Registrar of Companies with in 30 days of passing of Resolution in Board Meeting for Allotment of Shares.

STEP- To Issue of Share Certificates:

xvii. Issue Share Certificate in Form- SH-1 (as per Section-56) with in 2 (two) months from the date of Board Meeting in which allotment of shares made by the Company.

STEP- Payment of Stamp Duty on Issue of Share Certificate:

xviii. As per Indian Stamp Act, every company is required to make payment of Stamp Duty on Share Certificates within 30 days of issue of Share Certificates. Every state have their own process and provision for payment of stamp duty.

 A. Whether Valuation report required for Right Issue of Shares?

There is no requirement of Valuation Report for Right issue of shares. Company can issue shares on Face Value in case of Right Issue of Shares.

In case, Company proposing to issue shares on premium in that case Company should obtain Valuation Report from Registered Valuer.

B. Whether Company can receive allotment money in Cash u/s 62(1)?

Section 62(1) doesn’t prescribe the way of receipt of allotment money. By following the guidelines of Income Tax Act company can receive Allotment money in Cash also.

C. Whether there is any restriction on use of money received from subscribers of Right Offer?

Section 62(1) doesn’t put any restrictions on usage of subscription money. Company can use subscription money any time after receipt of same. One can opine that, Company can use subscription money of right issue even before allotment of shares.

D. What is minimum time gap between two Right Issue offer as per Companies Act, 2013?

Section 62(1) doesn’t prescribed provisions for minimum time gap between two Right Issue offers. One can opine that, Company can issue any numbers of Right issue offer during a financial year without any limit of time gap.

E. If one Right issue offer is going on in the Company. Whether company can open another right issue offer before completion of first?

Section 62(1) doesn’t restrict the issuance of New Offer letter until closure of earlier Right Offer.  One can opine that, a Company can simultaneously issue two right issue offers.

Basic Abouts Right Issue of Shares:

a) No need to open Separate Bank Account for Right issue of Shares.

b) No need to file any form for Issuance of Letter of Offer with ROC by Private Limited Companies.

c) PAS-3 can be file within 30 days of holding of Board Meeting for allotment of Share.

d) Shares can be issue on Face Value.

e) There is no restriction under Companies act to receive subscription money in cash also.

f) Only shares can be issue by Right Issue of Shares.

Important Notes:

• Tenure of redeemable preference shares must not exceed 20 years, unless infrastructure projects (up to 30 years permitted with 10% redemption annually after 20 years).
• Dividend on preference shares not mandatory unless declared — but unpaid dividends affect voting rights.
• Convertible preference shares must have conversion terms clearly stated upfront.
• Rights renunciation to others should be permitted only if AOA allows.

Conclusion

Issuing preference shares through rights issue under Section 62(1)(a) read with Section 55 of the Companies Act, 2013, offers companies a strategic means to raise capital while maintaining shareholder equity participation. Though commonly associated with equity shares, rights issue provisions are equally applicable to preference shares, provided the Articles permit such issuance and all prescribed conditions are met.

From a compliance standpoint, it is essential for companies to adhere to the procedural requirements, including clear disclosure of terms, proportionate allotment, proper documentation, and timely statutory filings. This method avoids the complexities of private placement while ensuring transparent and equitable capital restructuring.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).