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Understanding Redeemable Preference Shares: A Comprehensive Legal Guide
Redeemable preference shares are a hybrid financial instrument popular among companies for raising capital without diluting equity control indefinitely. These shares carry preferential rights to dividends and capital repayment but come with a redemption feature, allowing the company to buy them back after a specified period. If you're a company director, investor, or shareholder grappling with redeemable preference shares, this guide breaks down the legal framework, redemption processes, regulatory oversight, and judicial insights based on Indian law. Note: This is general information, not legal advice. Consult a qualified lawyer for your specific situation, as laws and facts vary.
What Are Redeemable Preference Shares?
Redeemable preference shares differ from ordinary preference shares by including a redemption clause. Holders receive fixed dividends and priority on capital repayment upon redemption, typically at face value or a premium. Under the Companies Act, 2013 (Section 55), companies must redeem these shares within 20 years from issuance, unless extended by the Tribunal.
Key features include:
- Preferential dividends: Fixed rate, often cumulative.
- Redemption timeline: Mandatory within 20 years, from profits or fresh share proceeds.
- Conversion options: Some are convertible to equity, blending debt and equity traits. (Hybrid securities - have some of the attributes of both debt securities and equity securities) SAHARA INDIA REAL ESTATE CORPORATION LIMITED VS SECURITIES AND EXCHANGE BOARD OF INDIA - 2012 6 Supreme 400
Failure to redeem doesn't automatically make holders creditors; they remain shareholders. (Holders of redeemable preference shares do not automatically become creditors of the company upon the company's failure to redeem the shares) LAKHAND SURANA VS HYDERABAD VANASPATHY Ltd. , MOULALI, HYDERABAD - 1988 Supreme(AP) 109
Legal Framework Governing Redemption
Companies Act, 2013 - Section 55
Section 55 mandates redemption from:
1. Profits available for dividends, or
2. Proceeds of a fresh share issue for redemption.
If unable due to losses, companies can issue fresh redeemable preference shares with 3/4th shareholder consent (in value). Upon issuance, original shares are deemed redeemed. Multiple NCLT rulings affirm this:
- Petitions approved for issuing new shares in lieu of unredeemed ones, ensuring compliance and shareholder consent. (The petition under Section 55 of the Companies Act, 2013 is approved to extend the tenure of Cumulative Redeemable Preference Shares) Nandi Infrastructure Corridor Enterprise Ltd vs ROC, Karnataka - 2025 Supreme(Online)(NCLT) 3786
- Tribunal satisfied with financial position, consents, and statutory adherence. (Company allowed to issue redeemable preference shares for unpaid dividends) HOTEL QUEEN ROAD PRIVATE LIMITED. VS - 2023 Supreme(Online)(NCLT) 2419
SEBI Regulations and Public Issues
SEBI oversees listed companies or those intending listing under Section 55A, Companies Act, 1956 (now aligned with 2013 Act). Optionally Fully Convertible Debentures (OFCDs) were ruled as securities requiring listing if offered publicly.
In Sahara cases, SEBI directed refunds for unlisted OFCDs sold to millions, deeming them public issues. (SEBI has jurisdiction... OFCDs issued by Saharas - Debentures in presenti and become shares in futuro) SAHARA INDIA REAL ESTATE CORPORATION LIMITED VS SECURITIES AND EXCHANGE BOARD OF INDIA - 2012 6 Supreme 400
Public issue thresholds: Over 49 persons triggers public offer rules (Section 67(3)). Non-listing mandates refunds with 15% interest. (Refund of the amount collected from the public with interest - Mandatory) SAHARA INDIA REAL ESTATE CORPORATION LIMITED VS SECURITIES AND EXCHANGE BOARD OF INDIA - 2012 6 Supreme 400
Redemption Process and Shareholder Rights
Redemption involves:
- Board resolution and notice.
- Funding from profits or new equity.
- Cancellation post-redemption.
Shareholders can't force winding up as creditors pre-redemption. (Redeemable preference shares can only be redeemed out of the company's profits or through a fresh issue of shares, which distinguishes them from ordinary creditors) LAKHAND SURANA VS HYDERABAD VANASPATHY Ltd. , MOULALI, HYDERABAD - 1988 Supreme(AP) 109
Transfer: Effective between parties but complete only on register entry. Transferee gains beneficial interest; transferor holds legal title as trustee. (However, on the transfer of shares, the transferee becomes the owner of the beneficial interest though the legal title continues with the transferor) Life Insurance Corporation Of India VS Escorts LTD. - 1985 Supreme(SC) 393
For extensions or reissues, NCLT approval needs:
- Special resolution with 75% consent.
- No prejudice to non-consenting holders.
- Compliance certificate. (On the issue of such further redeemable preference shares (NCRPS), the unredeemed preference shares shall be deemed to have been redeemed) PRIMA INDUSTRIES LIMITED VS REGISTRAR OF COMPANIES - 2026 Supreme(Online)(NCLT) 432
Tax Implications of Redeemable Preference Shares
Income Tax
Redemption from capitalized profits may be deemed dividend distribution. (When redeemable preference shares are redeemed, the preference share capital is returned to the shareholders and since such return... entails release of assets) Shashibala Navnitlal VS Commissioner of Income Tax, Gujarat - 1964 Supreme(Guj) 132
Expenses for issuance (underwriting, brokerage) are capital, not deductible. (Expenditure incurred for the issue of redeemable preference shares is capital expenditure and not revenue expenditure) HINDUSTAN GAS AND INDUSTRIES LTD. VS COMMISSIONER OF INCOME-TAX - 1978 Supreme(Cal) 527
Valuation for gifts/tax: Rule 10, Gift-tax Rules prioritizes asset-based over yield method if available. (If first method not available, second method to be resorted to) Commissioner Of Income-Tax VS Shah Bhavnani Chanabhai - 1997 Supreme(MP) 690
Under Section 56(2)(viib), fair market value (FMV) via Rule 11UA; expert reports upheld unless flawed. (Valuation methodology for redeemable preference shares must comply with prescribed rules) Revenue vs Assessee - 2024 Supreme(Online)(ITAT) 3357
Dividend Rebates
Pre-1968, rebates on gross dividends under Sections 85A/80M, not net of expenses. (rebate of income-tax is admissible on the actual amount of dividend received) Cloth Traders Private LTD. : Commissioner Of Income Tax: H. K. Investment Private LTD. : C. V. Mehta Private LTD. : Distributors Baroda Private LTD. VS Additional C. I. T. , Gujarat-i: H. K. Investment Private LTD. : Commissioner Of Income Tax Gujarat-iii: Commissioner Of Income Tax Gujarat-iii: Commissioner Of Income Tax Gujarat-iv - 1979 Supreme(SC) 299
Judicial Interpretations and Key Cases
Corporate Guarantees & Suits: In FMO vs. Defendant, conditional leave to defend granted; Rs. 418 crores deposit required. Defence on FEMA not substantial. (defendant has not raised a substantial defence) IDBI TRUSTEESHIP SERVICES LTD. VS HUBTOWN LTD. - 2016 8 Supreme 194
SEBI Enforcement: Sahara contemnors detained for non-refund; CPC inapplicable to SEBI proceedings. (Provisions of CPC per se inapplicable to proceedings under the SEBI Act) Subrata Roy Sahara VS Union of India - 2014 4 Supreme 129
Interest on Delays: SEBI may direct bank FD rate interest for takeover delays, adjustable against dividends. (interest at the rate of 10 per annum is directed) Clariant International LTD. VS Securities And Exchange Board Of India - 2004 7 Supreme 247
Winding Up Locus: No standing under Section 433(e) without creditor status. Petition dismissed. LAKHAND SURANA VS HYDERABAD VANASPATHY Ltd. , MOULALI, HYDERABAD - 1988 Supreme(AP) 109
Courts emphasize clean hands; non-compliance invites strict enforcement. (Those who seek relief from a court must come with clean hands) SAHARA INDIA REAL ESTATE CORPORATION LIMITED VS SECURITIES AND EXCHANGE BOARD OF INDIA - 2012 6 Supreme 400
Recent NCLT Trends
NCLT routinely approves reissues/extensions:
- 15-year extensions for cumulative shares. Nandi Infrastructure Corridor Enterprise Ltd vs ROC, Karnataka - 2025 Supreme(Online)(NCLT) 3786
- New non-cumulative shares for student housing firm. INDO-AMERICAN HYBRID SEEDS (INDIA)PRIVATE LIMITED VS - 2025 Supreme(Online)(NCLT) 12
- HSBC-related 9% shares reissued post-20 years. HSBC Securities and Capital Markets India Private Limited VS - 2023 Supreme(Online)(NCLT) 409
Minority can't oppose if 75% consent obtained. HOTEL QUEEN ROAD PRIVATE LIMITED. VS - 2023 Supreme(Online)(NCLT) 2419
Key Takeaways for Companies and Investors
- Companies: Plan redemptions meticulously; seek NCLT for extensions. Ensure SEBI compliance for public-ish offers.
- Investors: Beneficial interest transfers promptly; monitor redemption funds.
- Risks: Tax on deemed dividends; no creditor priority.
- Best Practice: Obtain valuations, consents, and list if public.
In summary, redeemable preference shares offer flexibility but demand strict adherence to timelines and consents. Recent rulings prioritize investor protection and regulatory compliance. For tailored advice, engage legal experts.
This article draws from judicial precedents and statutes as of latest available data. Laws evolve; verify current position.
Search Results for "Redeemable Preference Shares: Legal Guide & Rules"
1985 0 Supreme(SC) 393 • India - Supreme Court
E.S.VENKATARAMIAH, O.CHHINNAPPA REDDY, R.B.MISRA, V.BALAKRISHNA ERADI, V.KHALID
. - COST OF WRIT PETITION - - LIFTING THE VEIL IS PERMISSIBLE WHERE THE STATUTE ITSELF CONTEMPLATES- TRANSFER OF SHARES—TRANSFEROR ... However, on the transfer of shares, the transferee becomes the owner of the beneficial interest though the legal title continues ... in the register alone is entitled to receive the dividends, notwithstanding that he has already parted with his interest in the shares ... The proposal, as it finally emerged from Escorts Limited, was to issue debentures 17,50,000 Secured Redeemable Debentu....
1968 0 Supreme(SC) 384 • India - Supreme Court
S.M.SIKRI, K.S.HEGDE, R.S.BACHAWAT
of Rs. 10/- and 5000 51/2 per cent cumulative redeemable preference shares of Rs. 100/-. 2000 preference shares were held by New ... The preference shares were redeemable at the option of the Albion Plywoods Ltd., at any time after 10 years from the date of their ... of the preference shares into ordinary shares.
2016 8 Supreme 194 • India - Supreme Court
KURIAN JOSEPH, ROHINTON FALI NARIMAN
As a result of the said investment, FMO currently holds (i) 10% of the equity of Vinca through Class A shares and is entitled to ... Upon conversion, the 3 CCDs in Vinca will entitle FMO to 99% of the equity of Vinca (by allotment of additional Class A shares), ... Further, as on date, the Defendant owns 49% of the equity of Vinca through Class A shares and is entitled to 49% of the voting rights ... instruments (i.e. in the form of equity capital or compulsorily and ....
2014 4 Supreme 129 • India - Supreme Court
K.S.RADHAKRISHNAN, JAGDISH SINGH KHEHAR
refunded amounts to investors in cash – Contrary to SEBI directive – No details furnished – Only Rs.351 crores worth of debentures redeemable ... The companies were also directed, not to offer their equity shares/OFCDs or any other securities, to the public and/or invite subscription ... shares arising out of conversion of such OFCDs. ... The companies also confirmed in their above affidavits, that the total amount which would become redeemable, towards the end of the
1962 0 Supreme(SC) 134 • India - Supreme Court
K.SUBBA RAO, RAGHUBAR DAYAL, S.R.DASS
granted were maturing in September and were redeemable at Bombay. ... accord because those securities were redeemable at Bombay and the maturity date was approaching. ... Reference is made to the statement of Jayantilal, P.W. 6, a partner of the Firm Devkaran Nanjee, Brokers in Shares and securities
1978 0 Supreme(Cal) 527 • India - Calcutta
DIPAK KUMAR SEN, C.K.BANERJEE
INCOME TAX - Expenditure incurred for issue of redeemable preference shares - Whether revenue or capital expenditure - Held, capital ... Ratio Decidendi: The court held that the expenditure incurred by the assessee for the issue of redeemable preference shares ... Issues: Whether the expenditure incurred by the assessee for the issue of redeemable preference shares was revenue or capital ... It was further contended that the said ....
2023 Supreme(Online)(NCLT) 2419 • India - National Company Law Tribunal
DR. BINOD KUMAR SINHA, MEMBER (TECHNICAL), BACHU VENKAT BALARAM DAS, MEMBER (JUDICIAL)
request for reissue of shares - Company allowed to issue redeemable preference shares for unpaid dividends. ... (A) Companies Act, 2013 - Section 55(1), 55(2), 55(3) - Application for consent to issue fresh redeemable preference shares - Company ... in company petitions - Court ruled minority shareholders have no standing to oppose validly consented preference shares reissue ... preference shares ....
1964 0 Supreme(Guj) 132 • India - Gujarat
J.M.SHELAT, P.N.BHAGWATI
When redeemable preference shares are redeemed, the preference share capital is returned to the shareholders and since such return ... Ratio Decidendi: When accumulated profits are capitalised and redeemable preference shares are issued as bonus shares credited ... INCOME TAX - Dividend - Distribution of accumulated profits - Whether redemption of redeemable preference shares is....
2025 Supreme(Online)(NCLT) 3786 • India - National Company Law Tribunal
SHRI. SUNIL KUMAR AGGARWAL, SHRI. RADHAKRISHNA SREEPADA, JJ
The petition under Section 55 of the Companies Act, 2013 is approved to extend the tenure of Cumulative Redeemable Preference Shares ... The tribunal upheld that the preference shares can be redeemed according to statutory guidelines. ... by 15 years from the date of maturity of the Cumulative Redeemable Preference Shares, thus the total tenure being 30 years. ... maturity on the same terms as that of existing Cumulative Redeemable ....
2025 Supreme(Online)(NCLT) 3165 • India - National Company Law Tribunal
Yogendra Kumar Singh, Member (Technical), Rammurti Kushawaha, Member (Judicial)
for approval to issue fresh redeemable preference shares. ... ... ... Result: Petition allowed for issuance of new redeemable preference shares. ... (A) Companies Act, 2013 - Section 55(3) - Issuance of redeemable preference shares in lieu of unredeemed shares - Petition filed ... preference shares in lieu of the existing unredeemed preference shares....
2026 Supreme(Online)(NCLT) 432 • India - National Company Law Tribunal
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: p class ... On the issue of further redeemable preference shares (NCRPS),....
2025 Supreme(Online)(NCLT) 3165 • India - National Company Law Tribunal
Yogendra Kumar Singh, Member (Technical), Rammurti Kushawaha, Member (Judicial)
Subsequently, this instant petition has been filed by the petitioner for issuance and allotment of fresh redeemable preference shares in lieu of the existing unredeemed preference shares of 3,00,000 (Three Lacs) Zero% Redeemable Convertible Preference shares ... Preference Shares of the Company in lieu of existing Unredeemed Preference Shares originally issued on 30.03.2015. .......
2026 Supreme(Online)(Ori) 437 • India - Orissa High Court
Seashore Securities Limited was found, upon investigation, to have issued Redeemable Preference Shares to the public in violation of the statutory framework governing public issues of securities. ... The record further discloses that the petitioner was a Director of the company during a part of the period when the illegal issuance of Redeemable Preference Shares is alleged to have taken place. ... Rajiv Khurana2 (vi) The petitioner submitted that in the absence of any specific role at....
• India - Company Law Board
DHAN RAJ
redeemable preference shares were issued in lieu of the previously existing redeemable preference shares. ... the existing 19,000 redeemable preference shares which included 5,000 redeemable preference shares of the petitioners herein. ... According to section 80A, if a company issues further redeemable preference shares in re....
2023 Supreme(Online)(NCLT) 409 • India - National Company Law Tribunal
persons who have not consented to the issue of further redeemable preference shares”. ... 9% Redeemable Preference Shares due for redemption on 12 March 2021. ... lieu of old 25,00,000 9% Redeemable Preference Shares on the same terms and conditions drawn in the past. ... The Petitioner Company had allotted 9% 25,00,000 Redeemable Preference Shares on 12 March 2001 to HSBC Invest....
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