Redeemable preference shares are ones that can be redeemed after a specific period of time, according to the Companies Act of 2013. (not exceeding twenty years). Redeemable preference shares are those in which the issuer has the option to redeem the shares within 20 years of issuance at the pre-determined price stated in the prospectus at the time preference shares were issued. Before redeeming such shares, the issuer must ensure that all conditions outlined at the time of issuance have been satisfied and that the shares are fully paid up.

Redeemable Preference Shares 

What are Redeemable preference shares? 

A shareholder receives preference shares that are embedded with a callable option, allowing the corporation to redeem them at a later time.

  • It is one of the strategies used by businesses to return cash to the company’s current shareholders. It is a method of repurchasing shares, although it differs from standard share buyback in several aspects.
  • The price at which firms can repurchase these redeemable shares is already determined at the moment the shares are issued.
  • Issuing callable preferential shares that can be redeemed in the future allows the corporation to choose between share repurchase and share redemption.

What are Preference Shares?

  • Companies will grant preference shares to any investor, with the understanding that the holders of the preference shares will be the first to receive dividend payments.
  •  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.

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, afterwards 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 must be called. The meeting must be advertised to the administration and stakeholders. This must be completed at least seven days before the meeting.

2. A resolution outlining the preference shares, the regulations defined, the type of preference shares to be issued, and the quantity of shares must be enacted at the final body meeting. In addition, the resolution to issue preferred shares and the redemption letter must be passed during the meeting.

3. Within 30 days of the resolution, SH-7 must be filed with the Registrar. The meeting minutes from the General Board meeting where the resolution was adopted and a genuine copy of the resolution that has been signed by the whole board should both be included in the SH-7.

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.

Certain clauses, however, may be altered/modified with the agreement of shareholders and under the conditions set out in Section 48 of the Act. These include the redemption of shares at a specific moment, during a specified term, or when the shareholders and/or the corporation have accepted and validated the transaction.

The specific cash obtained following share redemption is frequently held as Capital Reserve and may be used for any bonus on the issuing of shares. The corporation considers this quantity, which is part of the Capital Redemption Reserve, to be Paid-up Capital.

 Advantages of Redeemable Preference Shares

  • Issuing redeemable preferred shares gives the corporation the option of deciding whether to repurchase or redeem shares based on market conditions.
  • After deciding to repay shareholders, the corporation redeems shares. It’s a method of compensating shareholders similar to dividends. When firms redeem shares, the number of total shares outstanding for the company decreases, and the profits per share or EPS of the company increases, resulting in a rise in the share price.
  • By redeeming shares, the corporation gets rid of shares that were paying coupon rates that were substantially greater than the current dividend profit for the equity share—thus boosting the price for the company’s existing shareholders.
  • Redeemable preferential shares are frequently used to create exit chances for venture capital funds since they are provided with a predefined exit option at a predetermined time and price point.

Disadvantages of Redeemable Preference Shares

  • Only when the call price of the shares is below the current market price of the shares is it practicable for the firms to redeem these sorts of shares. Otherwise, it makes sense for the corporation to choose instead to share repurchases.
  • The company must wait for the time predetermined while issuing the shares before having to redeem the shares.