Companies Act Section 55 — Issue and redemption of preference shares
CHAPTER IV SHARE CAPITAL AND DEBENTURES
Commercial / Corporate
Summary
Sub-section (1) prohibits a company limited by shares from issuing preference shares that are irredeemable, meaning shares that can never be bought back or paid off, after the commencement of this Act.
Sub-section (2) allows a company limited by shares to issue preference shares that are liable to be redeemed within a period not exceeding twenty years from the date of their issue, provided the company's articles authorise this and subject to conditions that may be prescribed. The first proviso to this sub-section permits a company to issue preference shares for a period exceeding twenty years for infrastructure projects, but only if the company redeems such percentage of shares as may be prescribed on an annual basis, and this redemption is at the option of the preferential shareholders. The second proviso sets out four conditions: clause (a) states that such shares can only be redeemed out of the company's profits that would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made specifically for the purpose of redemption; clause (b) states that such shares cannot be redeemed unless they are fully paid; clause (c) states that when shares are proposed to be redeemed out of profits, a sum equal to the nominal amount of the shares to be redeemed must be transferred from those profits to a reserve called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital apply to this account as if it were paid-up share capital, except as provided in this section; and clause (d) deals with the premium payable on redemption, where sub-clause (i) applies to prescribed classes of companies whose financial statements comply with accounting standards under section 133, requiring the premium to be provided for out of the company's profits before the shares are redeemed, with a further proviso that for preference shares issued on or before the commencement of this Act, the premium may be provided for out of profits or out of the company's securities premium account, and sub-clause (ii) applies to all other cases, requiring the premium to be provided for out of the company's profits or out of the company's securities premium account before the shares are redeemed.
Sub-section (3) addresses a situation where a company cannot redeem preference shares or pay dividend on them as per the terms of issue, referring to such shares as unredeemed preference shares. In this situation, the company may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by the company, issue further redeemable preference shares equal to the amount due, including the dividend, in respect of the unredeemed preference shares. Once these further redeemable preference shares are issued, the unredeemed preference shares are deemed to have been redeemed. The proviso to this sub-section requires the Tribunal, while giving its approval, to order the immediate redemption of preference shares held by persons who did not consent to the issue of further redeemable preference shares. The Explanation clarifies that issuing further redeemable preference shares or redeeming preference shares under this section is not considered an increase or reduction in the company's share capital.
Sub-section (4) states that the capital redemption reserve account may, notwithstanding anything in this section, be used by the company to pay up unissued shares of the company that are to be issued to members as fully paid bonus shares. The Explanation clarifies that for the purposes of sub-section (2), the term infrastructure projects means the infrastructure projects specified in Schedule VI.
Official Text
(1) No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable.
(2) A company limited by shares may, if so authorised 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 the purposes of 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 reduction of 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:
Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.
(ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.
(3) Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed:
Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.
Explanation.—For the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company.
(4) The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
Explanation.—For the purposes of sub-section (2), the term “infrastructure projects” means the infrastructure projects specified in Schedule VI.