The maximum period for which preference shares can be issued shall not exceed 20 years (according to Section 80A). This means that preference shares must be redeemed within a period of 20 years from the date of issue and companies are prohibited from issuing irredeemable preference shares.
Where shares are redeemed otherwise than from the proceeds of a fresh issue, the company is required to transfer, out of the profits of the company which would otherwise be available for dividends, to a capital redemption reserve account a sum equal to the nominal amount of shares redeemed. The reserve account is treated as if it were paid-up share capital. This is based on the fundamental principle that the capital of the company must be maintained intact. The subscription made to the capital of a company cannot be taken back, but can be converted into liquid cash by the sale of relative shares in the market. For the same reason, the redemption of preference shares must be done only out of the company's profits. Such redemption is an exception to the prohibition contained in Section 77 of the act as the company cannot buy its own shares.
In the case of cumulative preference shares, the fixed dividend accumulates to the credit of the preference shareholder.A preference shareholder is a shareholder of the company and not its creditor, and hence cannot exercise the rights of a creditor if the company fails to redeem the shares on the due date. However, the shareholder may approach the court for the winding-up of a company in default on just and equitable grounds.
The redemption of preference shares does not reduce the authorized and issued capital of a company. Where preference shares are redeemed, the company has the power to reissue preference shares up to the nominal amount of the shares redeemed.
Another distinctive feature of preference shares is that the capital redemption reserve account may be applied in paying for unissued shares of the company to be issued to members as fully paid bonus shares.
preference shareholders also have a right to vote on every resolution placed before the company at any meeting if dividends due on preference capital or any part of such dividends has remained unpaid. In the case of non-cumulative preference shares, the right to vote arises if the dividend is in arrears in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the meeting or in respect of an aggregate period of not less than three years in the six years ending with the expiry of the financial year. The voting right on a poll is in the same proportion as the capital paid up in respect of preference shares is to the total paid-up equity capital of the company.
The rate of dividends on preference shares or convertible preference shares should not exceed 300 base points over the prime lending rate of the State Bank of India on the date of the board meeting at which the issue of such shares is recommended.
Foreign institutional investors can invest up to an individual limit of 10% with an aggregate limit of 24% by all foreign institutional investors; this can be increased to 49% with the approval of the board or general meeting of the investee company. Similarly, non-resident Indians can invest in a Indian company with an individual limit of 5%. The non-resident Indian portfolio investment can be up to 10%, and can be increased to 24% with the approval of the board or general meeting of the investee company. These percentages refer to the paid-up capital of the Indian company.
