September 2024

Preference shares or preferred stocks are company stocks which extend dividends to its shareholders. Though such shares extend a fixed dividend, they do not come with any voting rights. Notably, a company often issues different types of preference shares which are distinct in their features and associated benefits. What are Preference Shares? Preference shares or preferred stocks come with a preferential right when it comes to the distribution of dividends or during the liquidation of a company. It means, in both situations, preference shareholders are given more priority than other shareholders. Typically, preference shares are released to raise capital for the company, which in turn is known as preference share capital. It must be noted that preferred stockholders are partial owners of a company, but unlike common shares, preferred shares do not come with any voting rights. However, shareholders’ opinions may be taken into consideration during dissolution or altering the functions of an existing venture. Notably, the decision to announce dividends on preference shares lies entirely on the company’s management. Experienced investors and those who wish to stay invested in the market for a long time, find this share suitable. The fact that preference shares generate substantial earnings makes it a viable option for risk-takers. Types of Preference Shares Cumulative Preference Shares Holders of cumulative preference shares are entitled to receive the divided for a year in which dividends could not be paid due to losses or inadequate profit in the subsequent year(s) whenever there are sufficient profits. Non-Cumulative Preference Shares Holders of non-cumulative preference shares are NOT entitled to receive the dividend for a year in which dividends could not be paid in the subsequent year(s). Therefore, for non-cumulative preference shares, the right to dividend for a year cannot be carried over in subsequent years. Participating Preference Shares Participating preference shares are eligible to receive surplus profit or dividends in the company, in addition to being entitled for fixed dividend. Non-participating Preference Shares Non-participating preference shares are those shares that are not entitled to participate in surplus profits of the company. Non-participating preference shares are only entitled to fixed dividend payments. Redeemable Preference Shares Redeemable preference shares are those shares that would be redeemed by the company within a period of 20 years from the date of issue. Irredeemable Preference Shares Irredeemable preference shares are those preference shares that would NOT be redeemed by a company. Companies in India are not allowed to issue irredeemable preference shares. Convertible Preference Shares Convertible preference shares can be converted into equity shares of the company as per the terms and conditions of their issue. Non-convertible Preference Shares Non-convertible preference shares are not convertible into equity shares of the company but still have preferential rights to payment of capital in the event of winding up of the company. Issuing Preference Shares in a Private Limited Company A private limited company or limited company having share capital may issue preference shares, if authorized by the articles of association of the company, subject to the following conditions: The issue of preference shares by the company is authorized by passing a special resolution in a general meeting of the company; AND The company, at the time of such issue of preference shares, has not defaulted in the redemption of preference shares issued either before or after the commencement or in payment of dividend due on any preference shares. In addition to the above, the company issuing preference shares must set out in the articles of association of the company, the following regulations: Priority of preference shares with respect to dividend payment and repayment of capital over equity shares; Participation in surplus funds of the company; Participation in surplus assets and profits, on winding up of the company; Payment of dividend on cumulative or non-cumulative basis; Conversion of preference shares into equity shares; Voting rights of the preference shares; Redemption of preference shares; Difference Between Equity Shares and Preference Shares This table highlights the basic differences between equity shares and preference shares. Parameter Preference Share Equity Share Definition It offers preferential rights in terms of receiving dividend or capital amount. It represents shareholders’ ownership in a company. Rate of dividend Dividend payout’s rate is fixed. Dividend payout’s rate fluctuates with more earnings. Dividend payout Preferred stockholders are given more priority over common stockholders during dividend payment. Shareholders avail dividend only after other liabilities have been paid. Bonus shares Shareholders may receive bonus shares against current shareholdings. Shareholders may receive bonus shares against their shareholdings. Capital repayment Capital repayment is made before equity shares. Capital is repaid at the end. Voting rights Shareholders do not enjoy voting rights. Shareholders avail voting rights. Participation in management Shares do not come with management rights. Equity share allows shareholders to partake in company management. Convertibility Preferred stocks can be converted. Equity stocks cannot be converted. Arrears of dividend Shareholders may receive a cumulative dividend. Shareholders are not entitled to avail cumulative dividends. Types Preference shares and its types include, convertible, non-convertible, participatory, non-participatory, cumulative, non-cumulative, etc. They are simply classified as ordinary or common stock of a company. Issuance It is not mandatory to issue preference shares. Companies must issue equity shares. Suitability It is considered suitable for investors with low risk-taking capacity. It is considered for investors who can take risks. FAQs What is redeemable and non-redeemable preference shares? The redeemable preference shares are repurchased at a fixed rate on a certain fixed date or by an advanced announcement. On the other hand, non-redeemable preference shares cannot be redeemed or repaid during the company’s operational lifespan. What is the meaning of cumulative and non-cumulative preference shares? A cumulative preference share entitles an investor to dividends that were missed previously. While a non-cumulative preference share doesn’t provide investors to avail of any dividends that were missed earlier.

The primary objective of the revisions made to the Companies Act 1956 was to have a simplified law that will be able to address the changes taking place in the national and international scenario, enable the adoption of internationally accepted best practices and also provide flexibility in response to the ever-changing business models. One such aspect which was introduced in the Companies Act 2013 was the concept of Dormant Companies in section 455 of this act. In common parlance, the word “Dormant” means inactive or inoperative. A dormant company is an excellent opportunity to start a company for a future project or hold an asset/intellectual property without having significant accounting transactions. On the other hand if a company has not filed its annual returns for two consecutive years then such a company will also be called as a dormant company. Significant accounting transactions would mean transactions other than the basic procedural transactions i.e the payment of fees by a company to the Registrar and also payments to fulfil the requirements of this Act or any other law, allotment of shares to fulfil the requirements of this Act and payments for maintenance of its office and records.  Concept of Dormant Company A dormant company under Section 455 of the Companies Act 2013 is a registered entity that is inactive with no significant accounting transactions, existing for holding an asset, intellectual property, or for a future project, and has applied to the Registrar to obtain dormant status and successfully obtained the status of Dormant Company. A dormant company may either be a public company or a private company or a one person company (OPC). Invest now shine later serves as a core policy of dormant companies. The companies are in a position to hold assets or intellectual property and use it later and why would they do this? Cost Advantage is the reason for it. Well, the restart is always better than a fresh start and dormant companies offer this advantage. So if a company chooses to take a backseat for a good reason then they can always restart when they want to, without further procedures subject to certain conditions. The longer you exist the greater you are valued. So as a dormant company, the company may not be active but it still has a status of a company in the eyes of law. Procedural Formalities to get the Status of a Dormant Company There should have been no inspection, inquiry or investigation ordered/taken up/carried out against the company nor any prosecution initiated/pending against the company under any law. The company should have no outstanding deposits nor should have defaulted in payment of the amount or interest. The company should not have any outstanding loan, whether secured or unsecured.The company may apply under this rule after obtaining the concurrence of the lender and enclosing the same with Form MSC-1 There should be no dispute in the management or ownership of the company and a certificate in this regard is enclosed with Form MSC-1 The company should not have any outstanding statutory taxes, dues, duties etc. payable to the Central Government/State Government / local authorities etc.and also not defaulted in the payment of workmen’s dues; The securities of the company should not be listed on any stock exchange within or outside India. Special provisions applicable to a dormant company Directors Minimum number of directors: Public Company:3 Private Company:2 One Person Company:1 Rotation of auditors Not applicable Return of Dormant Company-MSC-3 Financial position duly audited by a chartered accountant should be filed within 30 days from the end of financial year Return of allotment and change in directors As specified in the act COMPLIANCES FOR DORMANT COMPANY 1) Company needs to have minimum number director as required by Companies Act, 2013 i.e. at least 3 Directors in case of a Public Company, 2 for Private Company and 1 for OPC. 2) The company shall continue to file the returns of allotment and change in directors, whenever the company allots any security to any person or there is any change in the directors of the company. 3) The Dormant Company is required to hold at least one meeting of the Board of Directors in every half year. The gap between two meetings shall not be more than 90 days. 4) The maximum tenure for which a company can remain dormant is 5 consecutive financial years. If a company remains dormant for more than 5 years, the Registrar commences the process of striking off the name of the company from the Records, i.e. the company will be removed. 5) A dormant company is required to file a “Return of Dormant Company” in Form MSC-3 annually, interalia, indicating financial position duly audited by a Chartered Accountant in Practice along with such annual fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within a period of thirty days from the end of each financial year. 6) No need not enclose cash flow statements in its annual accounts. 7) The provisions of the Act in relation to the rotation of auditors are not applicable to dormant companies. Reactivation of a Dormant Company In order to move from red(inactive) to green(active) the company will have to: File form MSC-4 File MSC-3 And pay a prescribed fee Further, Once the above points are done, the Registrar will issue the fcertificate in form MSC-5 allowing the status of an active company. In some cases, If the registrar has a reason to believe that the company that has applied for the dormant company status has been actually functioning, after completing enquiry and also after giving the company a reasonable opportunity to be heard, may treat the company as an active one. If the company fails to comply with anything mentioned under the grounds of the application for status of the Dormant company, then the directors shall apply for obtaining the status of an active company within 7 days Eligibility i.Any inspection, inquiry or investigation has been ordered or taken up or carried out against