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Home > Articles> Issue and Redemption of Preference, Equity & Sweat Equity Shares

Issue and Redemption of Preference, Equity & Sweat Equity Shares

Sujal Juneja

In Share and Share Capital | Meaning, Types, Issue & Allotment of Securities, we discussed about share capital, now let’s discuss about how preference and equity shares are issued & redeemed as per companies act, 2013


Issue of Preference Shares

Preference Share is a share which has priority in getting fixed rate of dividend and repayment of capital at the time of winding of company.


A Company can issue preference shares if it is authorised by its Article of Association, if it is not authorised then alter the AOA as per section 14 of companies act. To proceed further, call board meeting to pass board resolution to authorise issue of preference shares and calling general meeting. Conduct general meeting and pass special resolution of members. File the resolution with the Registrar of Companies (ROC) in Form no. MGT-14. Preference shares have a predetermined maturity life. Company can issue preference shares for a maximum of 20 years i.e., the company has to pay cash or issue shares depending on the type of preference shares after the maturity period. However, if company is engaged in infrastructure projects as specified in Schedule VI of the companies act, it can issue preference shares for a maximum of 30 years but it has to redeem these shares proportionately from 21st year, for example if an infrastructural company is issuing preference shares with maturity period of 25 years it has to redeem 20% (100% / 5 years) every year. However, it depends on the shareholder whether he/she wants this option or not.



Redemption of Preference Shares

To redeem preference shares, it should be fully paid up. Payment for redemption of preference shares can be made from profits available for distribution or out of proceeds of fresh issue of other class of shares. When the shares are redeemed out of profits then face value of preference shares redeemed shall be transferred to Capital Redemption Reserve which can be used to issue fully paid up bonus shares only. If premium is payable on redemption, it can be paid from profits available for distribution or securities premium reserve. However, companies who are required to comply with Accounting standards cannot use securities premium reserve to pay premium on redemption of preference shares.


If a company is not in position to redeem preference shares, then it can with the consent of 75% in value of preference shareholders and National Company Law Tribunal (NCLT) can issue further preference shares and can redeem existing preference shares from proceeds of such issue. However, shareholders who do not consent must be paid immediately.


After Redemption, File Form SH-7 with ROC within 30 days.



Issue of Equity Shares

Equity Shares are shares which represent ownership in the company & do not have fixed dividend & priority in repayment of capital at the time of winding up.


To issue equity shares with differential voting rights, it should be authorised by Article of Association (AOA). Pass Board Meeting & pass board resolution to authorise the issue and call general meeting to pass Ordinary Resolution. If a company is listed, ordinary resolution should be passed by postal ballot. File the resolution with the Registrar of Companies (ROC) within 30 days.Total DVR shares cannot be more than 74% of total voting power. There should not be any default in filing Accounts & annual return of the company in the last 3 years & repayment of interest on loan, deposit, debentures or repayment of matured loan,debentures or preference shares or dividend on shares. Aldo company should not be convicted for any offence under SCRA Act,1956, SEBI Act,1992, FEMA Act,1999, RBI Act 1934 or any other act under which it is being regulated. Company can’t convert its equity shares with differential rights into normal equity shares and vice versa.



Redemption of Equity Shares

Equity Shares do not have any maturity period. If there is any surplus at the time of winding up after paying all outside debts & preference shareholders, it will be distributed among equity shareholders.


Issue of Sweat Equity Shares

Sweat Equity Shares means equity shares issued by the company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available Intellectual Property Rights.


It can be issued if authorised by Article of Association & by passing a Special resolution. The resolution must specify the number of shares, their current market price, consideration (if any) and class of directors or employees to whom they are issued. Only the class of shares which are already issued can be issued as sweat equity shares. It can be issued only to permanent employees who are working in or outside India, any director of the company, subsidiary company or Holding Company. Company can issue a maximum of 15% of Paid up Equity Share Capital or ₹5 crores whichever is higher in a financial year and at any point of time it should not have sweat equity shares more than 25% of Paid up Equity Share Capital. However, Start up companies can have sweat equity shares up to 50% of its Paid up equity share capital instead of 25% for 10 years from Date of its Incorporation.

For example, a company has equity paid up capital of ₹100 crores then it can issue sweat equity shares of ₹15 crores in a financial year and can have at most of ₹25 crores and start up company can issue same ₹15 crores but can have sweat equity shares worth ₹50 crores.


Also Read Types & Issue of Prospectus | Companies Act