Conversion of Preference shares to equity

[anushaka basu]

Hi All,

Please let me know your thoughts, if reduction of compulsorily convertible preference shares into equity shares shall led to reduction of share capital under Section 100 of the 1956 Act.

[Unnikrishnan P S]

Dear Friend,

 

     The same will not lead to Reduction of Capital as we had recently done such a transaction

 

The issue arises whether such conversion of CCPS into equity shares would be construed as “reduction of capital” of the Company, since as per section 100 of the Companies Act, 1956 (“Co Act”) any reduction of capital of an Indian company would require sanction of the concerned High Court.  However, there are exceptions to that section.   As per section 77A of the Co Act, any buy back of shares of the company would not amount to reduction of capital as specified under section 100 the Co Act, hence no court approval would be required.  However, certain other conditions specified under section 77A of the Co Act and relevant regulations issued there under needs to be complied with.

 

Further, Section 77(5) of the Co Act states that redemption of any preference shares under section 80 of the Act do not amount to buy back of shares.  Section 80(3) of the Act states that redemption of preference shares would not amount to reduction of authorized share capital of the company, provided that the terms of redemption of preference shares including option of conversion into equity shares are mentioned at the time of issue itself.  However, the issuing company must have power under its Articles of Association to issue such class of preference shares.  Later on, upon conversion of such CCPS in to equity shares of the company needs to be reported to the Registrar of Companies, within 30 days from the date of conversion in prescribed Form 21 electronically, as required under section 95 of the Act.

 

Therefore, redemption of CCPS through conversion into equity would not be construed as reduction of capital of the company, as specified under section 100 of the Co Act. Hence, there is no requirement to comply with the procedure laid down under section 100 of the Act and obtain the approval of the High Court.

 

Learned friends view solicited

Regards,

Unnikrishnan P S

Small opportunities are often the beginning of great enterprises

On Fri, Mar 7, 2014 at 2:56 PM, anushaka basu <anusha...@gmail.com> wrote:

Hi All,

Please let me know your thoughts, if reduction of compulsorily convertible preference shares into equity shares shall led to reduction of share capital under Section 100 of the 1956 Act.

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[anushaka basu]

Dear Unnikrishnan,

Thanks for response. 

In my case we have 10 CCP converting into 1 equity. The face of 1 CCPS is Rs.110 and face value of equity share is Rs.10. In this case does it amount to reduction under Section 100.

[Unnikrishnan P S]

Dear Anushaka,

     The same can be done.

Regards,

Good to know you!

Unnikrishnan P S

[Abhishek Lakhotia]

Hi,

Can you mention the capital clause as pre and post conversion of MOA.

Thanks

Abhishek