Redeemable preference shares, as per the Companies Act 2013, are those that can be redeemed after a period of time (not exceeding twenty years). Redeemable preference shares are those shares where the issuer of the share has the right to redeem the shares within 20 years of the issuance at the pre-determined price mentioned within the prospectus at the time of issuance of preference shares and before redeeming such shares the issuer shall assure that redeemable preference shares are paid up fully and each condition specified at the time of issuance are fulfilled.

What are Redeemable preference shares? 

Preference shares are issued to a shareholder which has a callable option embedded, meaning they can be redeemed later by the company.

  • It is one of the methods that companies embrace in order to return cash to the existing shareholder of the company. It is a way of share repurchase but is different from traditional share repurchase in certain ways.
  • The price at which companies can repurchase these redeemable shares are already decided during the time of issuing those shares
  • Issuing callable preferential shares that can be redeemed in the future provides the company flexibility to choose from whether to go for share repurchase or go for shares redemption. 

What are Preference Shares?

  • Preference shares will be allotted by companies to any investor, with the agreement that whenever a dividend is paid, the holders of the preference shares are the primary to be paid.
  •  Preference shares enjoy certain profits as against the other shares. 
  •  The dividend of a preference share is fixed at a decided rate (or a set amount) even before the dividend on equity shares. 
  • The preference shares must be repaid before all other investors and shareholders in the event of the winding-up of the company.
  •  The issue of preference share is complete as per the rules prescribed under Section 48 of the Companies Act, 2013.

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Types of Preference Shares

Redeemable Preference Shares

There are eight types of preference shares. just in case of dissolution of the company, any of the eight types would be paid out before other forms of equity. Let’s understand each of them: 

  • Cumulative: all dividends are carried forward until specified. And paid out only at the end of the definite period.
  • Non-cumulative: The contrary of cumulative. Dividends are paid out of profits each year. There aren’t arrears carried over a period of time to be paid at the end of the term. 
  • Redeemable: Such preference shares are often claimed after a set period or after giving due notice.
  •  Non-Redeemable: Non-redeemable preference shares cant be redeemed during the lifetime of the company. But it can only be obtained at the time of carrying out (liquidation) of assets.
  • Convertible: The shares are also converted into equity shares after a time period, or as per the conditions laid down within the terms.
  • Non-convertible: non-convertible preference shares can not be, at any time, converted into equity shares. 
  • Participating: Such shares have the right to take part in any other profits, afterward paying the equity shareholders. Furthermore, the accumulation of profit is apart from the fixed dividend paid up for preference shares. 
  • Non-Participating: Non-participating preference shares don’t have any right to participate in surplus profits or any surplus gained at the time of liquidation of the company 

Process for Redemption of Preference Shares

These three steps are essential to be followed to redeem the preference shares:

1. A meeting of the general body needs to be termed. A notice has to be issued to the administrators and stakeholders regarding the meeting. This has to be done a minimum of seven days before the meeting.

2. At the final body meeting, a resolution has to be passed regarding the preference shares, the rules specified upon, the type of preference shares to be issued, and also the number of shares. Also, the resolution for issuing preference share and a letter for redemption must be passed during the meeting.

3. Within 30 days of the resolution, SH- 7 must be filed with the Registrar. The SH-7 should contain the minutes of the meeting (the General Board meeting where the resolution was passed) and a real copy of the resolution signed by all the members of the board. 

When can preference shares be redeemed? 

Certain provisions must be fulfilled, under Section 48 of the Companies Act, 2013, for preference shares to be redeemed.

1. The redeemable preference share must be wholly paid up.

2. The redeemable preference share may be redeemed provided that the terms laid down at the time of issue are met.

However, on approval of shareholders and under the conditions laid down in Section 48 of the Act, certain provisions may be altered/modified. These include redemption of shares at a fixed time or during a selected period or at the time the shareholders and/or the company have approved and ratified.

The particular sum received after redemption of shares is often kept as Capital Reserve and may be utilized for any bonus on the issue of shares. This sum, within the Capital Redemption Reserve, is treated as Paid-up Capital by the company.

 Advantages of Redeemable Preference Shares

  • Issuing redeemable preferential shares provides the company with a choice to make a choice from whether to repurchase shares or redeem shares depending on the market condition.
  • The company redeems shares after it decides to pay back the shareholders. It’s some way of paying the shareholders like paying dividends. When shares are redeemed by the companies, the number of total shares outstanding reduces for the company, and also the earnings per share or the EPS of the company increases, which ends up in a rise within the share price.
  • By redeeming shares, the company, utmost of the time, get rid of shares that were paying coupon rates, which are much higher than the current dividend profit for the equity share—thus, increasing the price for the existing shareholders of the company.
  • Redeemable preferential shares often provide exit opportunities for venture capital funds, which are given with a predetermined exit option at a predetermined time and predetermined price point.

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Disadvantages of Redeemable Preference Shares

  • These types of shares are feasible for the companies to redeem only when the call price of the shares is not up to the present market price of the shares. Otherwise, it’s reasonable for the company to go for share repurchases in its place.
  • The company must wait for the time predetermined while issuing the shares before having to redeem the shares.