Section 55 of the Companies Act, 2013: Issue and Redemption of Preference Shares

Section 55 regulates the issue and redemption of preference shares by a company limited by shares. The section prohibits irredeemable preference shares, ordinarily requires redemption within 20 years, prescribes the permitted sources and conditions for redemption, and provides a mechanism for dealing with preference shares that a company is unable to redeem.

Current-law overview: Section 55 should be read with Sections 43, 48, 52, 88 and 133 of the Companies Act, 2013 and Rules 9 and 10 of the Companies (Share Capital and Debentures) Rules, 2014. For an issue made by private placement, the applicable requirements of Section 42 and the relevant rules must also be considered.

Meaning of Preference Share Capital

Under Section 43 of the Companies Act, 2013, preference share capital broadly means issued share capital carrying a preferential right with respect to payment of dividend and repayment of capital on winding up or repayment of capital. Preference shares may carry additional rights according to their terms of issue, the company's articles and applicable law.

The essential feature for Section 55 is that preference shares issued after commencement of the Companies Act, 2013 cannot be irredeemable.

Section 55 - Issue and Redemption of Preference Shares

1. Irredeemable preference shares are prohibited

A company limited by shares cannot issue preference shares that are irredeemable.

2. Normal maximum redemption period is 20 years

If authorised by its articles, a company limited by shares may issue redeemable preference shares. Ordinarily, they must be redeemable within a period not exceeding 20 years from the date of issue, subject to the prescribed conditions.

3. Sources from which preference shares may be redeemed

Redemption can be made only out of profits that would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption.

4. Shares must be fully paid

Preference shares cannot be redeemed unless they are fully paid.

5. Capital Redemption Reserve

Where redemption is made out of profits, an amount equal to the nominal value of the shares redeemed must be transferred out of those profits to the Capital Redemption Reserve Account, subject to Section 55.

6. Premium payable on redemption

The source from which premium on redemption is to be provided depends on the class of company and the applicable accounting-standard framework under Section 133. Section 55(2)(d) should be applied to the company's facts and the date on which the preference shares were issued.

Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014

Rule 9 supplements Section 55. In substance, a company issuing preference shares must ensure that its articles authorise the issue and that the issue is approved by the shareholders through the resolution required by the rule. The prescribed disclosures concerning the proposed preference shares must be placed before shareholders.

The terms commonly required to be disclosed include the size of the issue, nature of the preference shares, objectives and manner of issue, issue price and pricing basis, dividend terms, redemption tenure and premium, conversion terms where applicable, mode of redemption, current shareholding pattern and expected equity dilution upon conversion.

The company must also maintain the prescribed particulars of preference shareholders in its Register of Members. If the preference shares are proposed to be listed, applicable securities regulations must also be followed. Redemption must take place according to the original terms of issue or terms validly varied with the approval of preference shareholders under Section 48.

Preference Shares for Infrastructure Projects

Section 55 permits preference shares connected with infrastructure projects to run beyond the ordinary 20-year limit, subject to prescribed annual redemption. Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014 permits a company engaged in setting up and dealing with infrastructure projects to issue preference shares for a period exceeding 20 years but not exceeding 30 years.

For such shares, at least 10% must be redeemed each year from the 21st year onwards, or earlier, on a proportionate basis at the option of the preference shareholders, subject to the applicable rule.

Capital Redemption Reserve Account

When preference shares are redeemed out of distributable profits, Section 55 requires transfer of a sum equal to the nominal amount of the shares redeemed to the Capital Redemption Reserve Account (CRR). For the purposes specified in the Act, CRR is treated similarly to paid-up share capital.

Section 55(4) specifically permits the CRR to be used for paying up unissued shares of the company to be issued to members as fully paid bonus shares.

What Happens if the Company Cannot Redeem Preference Shares?

Section 55(3) provides a statutory mechanism where a company is unable to redeem preference shares or pay dividend on them according to their terms. With the consent of holders representing three-fourths in value of the affected preference shares and approval of the National Company Law Tribunal (NCLT), the company may issue further redeemable preference shares equal to the amount due, including dividend.

On issue of those further redeemable preference shares, the earlier unredeemed preference shares are deemed to have been redeemed. The Tribunal must, while granting approval, order immediate redemption of the preference shares held by persons who did not consent to the issue of further redeemable preference shares.

The statutory explanation clarifies that an issue or redemption carried out under this mechanism is not treated as an increase or reduction of share capital merely for that reason.

Practical Compliance Checklist

Confirm that the company is permitted by its articles to issue preference shares.
Identify whether the shares are cumulative or non-cumulative, participating or non-participating, and convertible or non-convertible.
Approve the terms of issue through the board and obtain the shareholder approval required by the Act and Rules.
Where the issue is by private placement, separately comply with Section 42 and the applicable private-placement rules.
State the dividend, tenure, redemption date or event, premium, conversion terms and mode of redemption clearly.
Ensure the proposed redemption period complies with the 20-year limit or, for qualifying infrastructure projects, Rule 10.
Do not redeem partly paid preference shares.
At redemption, verify the lawful source of funds and make the required CRR transfer where redemption is out of profits.
Provide for any redemption premium in accordance with Section 55(2)(d) and the company's applicable accounting framework.
Maintain the required particulars in the Register of Members and complete applicable corporate filings.

Quick Reference

Issue	General rule
Irredeemable preference shares	Not permitted for a company limited by shares after commencement of the 2013 Act.
Ordinary maximum tenure	20 years from the date of issue.
Infrastructure projects	May exceed 20 years, but Rule 10 caps the period at 30 years and prescribes annual redemption from the 21st year onwards.
Condition for redemption	Shares must be fully paid.
Permitted redemption sources	Profits otherwise available for dividend or proceeds of a fresh issue made for redemption.
Redemption out of profits	Nominal amount redeemed is transferred to CRR.
Unable to redeem	Section 55(3) mechanism may be used with three-fourths consent in value and NCLT approval.
Use of CRR	May be used to pay up unissued shares issued to members as fully paid bonus shares.

Official Legal Resources

For the authoritative statutory text and current rules, refer to the official Ministry of Corporate Affairs resources:

This article is an explanatory guide. Statutory provisions, amendments, notifications, applicable accounting standards and securities regulations should be checked for the facts and date of a particular transaction.