ISSUE OF PREFERENCE SHARES AND DEBENTURES By Pradeep
ISSUE OF PREFERENCE SHARES AND DEBENTURES By Pradeep B. Kulkarni Partner V. Sreedharan & Associates
ISSUE OF PREFERENCE SHARES Questions: What are the basic two features of Preference Shares? Whether fixing the rate of dividend at the time of issue of Preference Shares is mandatory? In case of Equity Shareholders and Preference Shareholders are same, then which capital should be paid first in case of Winding Up? Can a Company issue irredeemable Preference Shares now a days? Whether authorisation to issue Preference Shares in AOA is mandatory?
ISSUE OF PREFERENCE SHARES What is the maximum redemption period of Preference Shares? Whether Preference Shares will have voting rights? When can Preference Shareholders vote at the general meeting? Whether declaration of Preference Dividend is mandatory every year? Who can declare the Preference Dividend? Can a Company issue 2 Equity Shares of Rs. 10/- each against 1 Preference Share of Rs. 10/- each at the time of conversion? If yes, how? What is the accounting treatment / journal entry?
ISSUE OF PREFERENCE SHARES Definition of Preference Share Capital Section 43 (b) – Preference Share Capital: means that part of the issued share capital which carries or would carry a preferential right with respect to— (a) payment of dividend, and (b) repayment, in the case of a winding up;
ISSUE OF PREFERENCE SHARES Section 55 – Issue and Redemption of Preference Shares Irredeemable Preference Shares Can not be issued Authorisation to Issue Preference Shares in AOA Redemption period – Not Exceeding 20 years For Infrastructural Projects – Not Exceeding 30 years, subject to the redemption of a minimum ten percent per year from the 21 st year onwards or earlier, on proportionate basis, at the option of the preference shareholders
ISSUE OF PREFERENCE SHARES Preference Shares can only be redeemed out of Profits or out of the proceeds of fresh issue of shares made for the purpose of such redemption Partly paid-up Preference Shares can not be redeemed In case of redemption is out of Profits then Capital Redemption Reserve to be created and a sum equal to the nominal amount of Preference Shares to be redeemed, to be transferred Capital Redemption Reserve account may used for issuing Bonus Shares, otherwise Reduction of Capital provisions would be applicable
ISSUE OF PREFERENCE SHARES Premium, if any, payable on redemption of Preference Shares shall be provided for Only out of profits – for those Preference Shares issued under the provisions of CA, 2013 and for those companies whose financial statement comply with Accounting Standards prescribed for such class of companies under Section 133 Can be out of profits or Out of Securities Premium – for those Preference Shares issued prior to CA, 2013 and where Accounting Standards as mentioned above is not applicable
ISSUE OF PREFERENCE SHARES 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 (unredeemed preference shares), it may, with the consent of the holders of 3/4 th in value 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.
ISSUE OF PREFERENCE SHARES Rule 9 of The Companies (Share Capital and Debentures) Rules, 2014 – Issue and Redemption of Preference Shares Two Conditions: Passing of Special Resolution the company, at the time of such issue of preference shares, has no subsisting default in the redemption of preference shares issued either before or after the commencement of CA 2013 or in payment of dividend due on any preference shares.
ISSUE OF PREFERENCE SHARES Resolution issuing Preference Shares shall contain the following matters: (a) the priority with respect to payment of dividend or repayment of capital vis- a-vis equity shares; (b) the participation in surplus fund; (c) the participation in surplus assets and profits, on windingup which may remain after the entire capital has been repaid; (d) the payment of dividend on cumulative or non-cumulative basis. (e) the conversion of preference shares into equity shares. (f) the voting rights; (g) the redemption of preference shares.
ISSUE OF PREFERENCE SHARES The explanatory statement inter-alia, provide the complete material facts concerned with and relevant to the issue of such shares, including the following: (a) the size of the issue and number of preference shares to be issued and nominal value of each share; (b) the nature of such shares i. e. cumulative or non - cumulative, participating or non – participating, convertible or non – convertible (c) the objectives of the issue; (d) the manner of issue of shares; (e) the price at which such shares are proposed to be issued;
ISSUE OF PREFERENCE SHARES (f) the basis on which the price has been arrived at; (g) the terms of issue, including terms and rate of dividend on each share, etc. ; (h) the terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion; (i) the manner and modes of redemption; (j) the current shareholding pattern of the company; (k) the expected dilution in equity share capital upon conversion of preference shares.
ISSUE OF PREFERENCE SHARES The Register of Members maintained shall contain the particulars in respect of such preference share holder(s). Listing of Preference shares -- Comply with the regulations made by the SEBI. A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act and the preference shares may be redeemed: (a) at a fixed time or on the happening of a particular event; (b) any time at the company’s option; or (c) any time at the shareholder’s option.
ISSUE OF PREFERENCE SHARES Methodologies Private Placement Rights Issue
ISSUE OF PREFERENCE SHARES Procedure for Private Placement First of all obtain Valuation Report Then finalise the list of proposed allottees / investors
ISSUE OF PREFERENCE SHARES Calling Board Meeting for: Approving the proposal for issue of Preference Shares Recommending increase of authorised capital, if necessary Recommending altering the AOA to insert the authorisation to issue Preference Shares, if required Approving draft PAS-4 – Offer Document Taking note of list of allottees / investors Taking note of Valuation Report Approving the date, time and venue of EGM / AGM Approving the draft Notice and Explanatory Statement Authorising one of the directors / CS to do necessary acts in this regard Despatching Notice of EGM / AGM to Shareholders
ISSUE OF PREFERENCE SHARES Holding EGM / AGM and passing Special Resolution / other resolution(s) Filing of Form MGT-14 Issuing PAS-4 to the Investors Obtaining Share Application Form cum acceptance letter Receiving the Share Application Money
ISSUE OF PREFERENCE SHARES Calling Board Meeting within 60 days from the date of acceptance of Share Application Money for: Allotting the Preference Shares Authorising the issuance of Share Certificates / Crediting the shares to respective demat accounts Authorising the payment of stamp duty Authorising one of the directors / CS to file PAS-3 and FC-GPR / ECB Updating ROM / PAS-5
ISSUE OF PREFERENCE SHARES Rights Issue Procedure a. Hold Board Meeting for proposing the Rights Issue of Preference Shares, price, ratio etc. , b. Circulate the offer to all the existing equity shareholders c. Receive the acceptance Letter(s) cum share application form(s) OR Renunciation Letter(s)
ISSUE OF PREFERENCE SHARES d. Receive the Share Application Money e. Hold another Board Meeting for the allotment of Preference Shares, authorisation for issuing the share certificate(s) / crediting the demat shares to demat accounts of the allottees f. File Form PAS-3 and FC-GPR within 30 days from the date of allotment g. Payment of requisite stamp duty h. Updating the Register of Members End of Issue of Preference Shares Slides
ISSUE OF DEBENTURES QUESTIONS Whether a Company can issue unsecured, redeemable debentures without complying the provisions relating to Deposits? Can a Company issue irredeemable debentures? In case of Secured Debentures, should the assets, on which the charge would be created, be of the Company only? Who has to create the Charge? The Company issuing Debentures? Or the Company which has provided its assets as a security?
ISSUE OF DEBENTURES Debentures are not considered as Deposits in case of Secured Debentures Fully Convertible Debentures within 10 years Listed non-convertible, redeemable, Debentures Optionally Convertible Secured Debentures considered as Deposits Unsecured Debentures, Non-Convertible, unlisted, redeemable Debentures Partly Convertible Debentures: The portion debentures which is convertible within 10 years is not considered as Deposits and the portion of debentures which is redeemable but not secured is considered as Deposit and the portion of debentures which is redeemable and secured is not considered as Deposit.
ISSUE OF DEBENTURES Section 71 A Company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting. Company can not issue Debentures carrying any voting rights
ISSUE OF DEBENTURES Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed under Rule 18 of The Companies (Share Capital and Debentures) Rules, 2014. The company shall create a debenture redemption reserve account out of the profits of the company and the amount credited to such account shall not be utilised by the company except for the redemption of debentures
ISSUE OF DEBENTURES No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed under Rule 18 of The Companies (Share Capital and Debentures) Rules, 2014.
ISSUE OF DEBENTURES A debenture trustee shall take steps to protect the interests of the debenture-holders and redress their grievances in accordance with such rules as may be prescribed under Rule 18 ibid. A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue
ISSUE OF DEBENTURES Where at any time the debenture trustee comes to a conclusion that the assets of the company are insufficient or are likely to become insufficient to discharge the principal amount as and when it becomes due, the debenture trustee may file a petition before the Tribunal and the Tribunal may, after hearing the company and any other person interested in the matter, by order, impose such restrictions on the incurring of any further liabilities by the company as the Tribunal may consider necessary in the interests of the debenture-holders.
ISSUE OF DEBENTURES Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on payment of principal and interest due thereon. If any default is made in complying with the order of the Tribunal under this section, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than two lakh rupees but which may extend to five lakh rupees, or with both. A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance
ISSUE OF DEBENTURES The Central Government may prescribe the procedure, for securing the issue of debentures, the form of debenture trust deed, the procedure for the debenture-holders to inspect the trust deed and to obtain copies thereof, quantum of debenture redemption reserve required to be created and such other matters.
ISSUE OF DEBENTURES RULE 18 of the Companies (Share Capital and Debentures) Rules, 2014 The company shall not issue secured debentures, unless it complies with the following conditions, namely: - (a) An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue. Exception for 10 years, but not exceeding 30 years, (i) Companies engaged in setting up of infrastructure projects; (ii) 'Infrastructure Finance Companies' as defined by RBI; (iii) Infrastructure Debt Fund Non-Banking Financial Companies’ as defined by RBI (iv) Companies permitted by a Ministry or Department of the Central Government or by Reserve Bank of India or by the National Housing Bank or by any other statutory authority
ISSUE OF DEBENTURES Debentures shall be secured by the creation of a charge on the properties or assets of the company or its subsidiaries or its holding company or its associates companies, having a sufficient value for the due repayment of the amount of debentures and interest thereon; the company shall appoint the debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest thereon;
ISSUE OF DEBENTURES In case of any issue of debentures by a Government Company which is fully secured by the guarantee given by the Central Government or one or more State Government or by both, the requirement for creation of charge shall not apply In case of any loan taken by a subsidiary company from any bank or financial institution the charge or mortgage under this sub-rule may also be created on the properties or assets of the holding company
ISSUE OF DEBENTURES The company shall appoint debenture trustees, after complying with the following conditions, namely: - (a) the names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders; (b) before the appointment of debenture trustee or trustees, a written consent shall be obtained from such debenture trustee or trustees and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures;
ISSUE OF DEBENTURES (c) A person shall not be appointed as a debenture trustee, if he- (i) beneficially holds shares in the company; (ii) is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company; (iii) is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;
ISSUE OF DEBENTURES (iv) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company; (v) has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon; (vi) has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or 50 lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year; (vii) is relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel
ISSUE OF DEBENTURES (d) the Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee or trustees, if any, may act: Provided that where such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders. (e) any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less than three fourth in value of the debentures outstanding, at their meeting.
ISSUE OF DEBENTURES Duties as per Rule 18(3) It shall be the duty of every debenture trustee to- (a) satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed; (b) satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders; (c) call for periodical status or performance reports from the company; (d) communicate promptly to the debenture holders defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee therefor;
ISSUE OF DEBENTURES (e) appoint a nominee director on the Board of the company in the event of(i) two consecutive defaults in payment of interest to the debenture holders; or (ii) default in creation of security for debentures; or (iii) default in redemption of debentures. (f) ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach; (g) inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed; (h) ensure the implementation of the conditions regarding creation of security for the debentures, if any, and debenture redemption reserve;
ISSUE OF DEBENTURES (i) ensure that the assets of the company issuing debentures and of the guarantors, if any, are sufficient to discharge the interest and principal amount at all times and that such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders; (j) do such acts as are necessary in the event the security becomes enforceable; (k) call for reports on the utilization of funds raised by the issue of debentures- (l) take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held; (m) ensure that the debentures have been converted or redeemed in accordance with the terms of the issue of debentures; (n) perform such acts as are necessary for the protection of the interest of the debenture holders and do all other acts as are necessary in order to resolve the grievances of the debenture holders.
ISSUE OF DEBENTURES The meeting of all the debenture holders shall be convened by the debenture trustee on- (a) requisition in writing signed by debenture holders holding at least one-tenth in value of the debentures for the time being outstanding; (b) the happening of any event, which constitutes a breach, default or which in the opinion of the debenture trustees affects the interest of the debenture holders. a trust deed to be executed shall be in the Form No. SH. 12 or as near thereto as possible shall be executed by the company issuing debentures in favour of the debenture trustees within 3 months of closure of the issue or offer. The provisions of sub-rules (2) to (5) of rule 18 shall not be applicable to the public offer of debentures.
ISSUE OF DEBENTURES Provisions relating to Debenture Redemption Reserves (DRR)– Rule 18(7) The company shall comply with the requirements with regard to DRR and investment or deposit of sum in respect of debentures maturing during the year ending on the 31 st day of March of next year, in accordance with the conditions given below: - (a) DRR shall be created out of profits of the company available for payment of dividend; (b) the limits with respect to adequacy of DRR and investment or deposits, as the case may be, shall be as under; - (i) DRR is not required for debentures issued by All India Financial Institutions regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures; (ii) For other Financial Institutions within the meaning of clause (72) of section 2 of the Companies Act, 2013, DRR shall be as applicable to Non -Banking Finance Companies registered with Reserve Bank of India.
ISSUE OF DEBENTURES (iii) For listed companies (other than All India Financial Institutions and Banking Companies), Debenture Redemption Reserve is not required in the following cases – (A) in case of public issue of debentures – A. for NBFCs registered with Reserve Bank of India under section 45 - IA of the RBI Act, 1934 and for Housing Finance Companies registered with National Housing Bank; B. for other listed companies; (B) in case of privately placed debentures, for companies specified in sub items A and B.
ISSUE OF DEBENTURES (iv) for unlisted companies, (other than All India Financial institutions and Banking Companies) – (A) for NBFCs registered with RBI and for Housing Finance Companies registered with National Housing Bank, Debenture Redemption Reserve is not required in case of privately placed debentures. (B) for other unlisted companies, the adequacy of Debenture Redemption Reserve shall be ten percent of the value of the outstanding debentures;
ISSUE OF DEBENTURES (v) In case a company is covered in item (A) or item (B) of sub-clause (iii) of clause (b) or item (B) of sub-clause (iv) of clause (b), it shall on or before the 30 th day of April in each year, in respect of debentures issued by a company covered in item (A) or item (B) of sub-clause (iii) of clause (b) or item (B) of sub-clause (iv) of clause (b), invest or deposit, as the case may be, a sum which shall not be less than 15% of the amount of its debentures maturing during the year, ending on the 3 lst day of March of the next year in any one or more methods of investments or deposits as provided in sub-clause (vi): Provided that the amount remaining invested or deposited, as the case may be, shall not at any time fall below fifteen percent. of the amount of the debentures maturing during the year ending on 31 sr day of March of that year.
ISSUE OF DEBENTURES (vi) for the purpose of sub-clause (v), the investments, as the case may be, are as follows: - (A) in deposits with any scheduled bank, free (B) in unencumbered securities of the Central methods of deposits or from any charge or lien; Government or any State Government; (C) in unencumbered securities mentioned in sub-clause (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882; (D) in unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882: Provided that the amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above.
ISSUE OF DEBENTURES (c) in case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture issue in accordance with this sub-rule. (d) the amount credited to Debenture Redemption Reserve shall not be utilized by the company except for the purpose of redemption of debentures. A trust deed for securing any issue of debentures shall be open for inspection to any member or debenture holder of the company, in the same manner, to the same extent and on the payment of the same fees, as if it were the register of members of the company; and A copy of the trust deed shall be forwarded to any member or debenture holder of the company, at his request, within seven days of the making thereof, on payment of fee.
ISSUE OF DEBENTURES Nothing contained in Rule 18 shall apply to any amount received by a company against issue of commercial paper or any other similar instrument issued in accordance with the guidelines or regulations or notification issued by the Reserve Bank of India. In case of any offer of foreign currency convertible bonds or foreign currency bonds issued in accordance with the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 or regulations or directions issued by the RBI, the provisions of Rule 18 shall not apply unless otherwise provided in such Scheme or regulations or directions. Nothing contained in Rule 18 shall apply to rupee denominated bonds issued exclusively to overseas investors in terms of A. P. (DIR Series) Circular No. 17 dated September 29, 2015 of the RBI.
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