# Issue and Redemption of Preference Shares — Section 55

## Types of Preference Shares

Basis	Types
Payment of dividend	Cumulative / Non-cumulative
Participation in surplus	Participatory / Non-participatory
Conversion	Convertible (mandatorily or optionally; partially or fully) / Non-convertible
Redemption	Redeemable / Irredeemable (cannot be issued)

## Core Prohibition

A company limited by shares shall NOT issue any preference shares which are irredeemable. Only redeemable preference shares may be issued.

## Conditions for Issue of Redeemable Preference Shares [Section 55(2)]

### 1. Authorisation by Articles

The company must be authorised by its Articles to issue redeemable preference shares.

### 2. Maximum Tenor — 20 Years

Redeemable preference shares must be redeemed within 20 years from the date of issue.

### 3. Special Resolution & No Default

Conditions for issue include:

(a) A special resolution in a general meeting must be passed.
(b) At the time of issue, the company should NOT have a subsisting default in:
(i) Redemption of preference shares, OR
(ii) Payment of dividend due on any preference shares.

### 4. Register of Members

A company issuing preference shares must maintain a Register of Members under Section 88 containing particulars of such preference shareholder(s).

### 5. Listing

If the company wishes to list preference shares on a recognised stock exchange, it must follow SEBI regulations.

## Exception to the 20-Year Tenor — Infrastructure Projects

For infrastructure projects (specified in Schedule VI), preference shares may be issued for a period:

Exceeding 20 years but not exceeding 30 years

Subject to: Redemption of at least 10% of such preference shares annually, beginning from the 21st year onwards or earlier, on a proportionate basis, at the option of the preferential shareholders.

## Redemption — Source of Funds [Second Proviso to Section 55(2)]

Preference shares shall be redeemed out of:

(a) Profits of the company which would otherwise be available for dividend, OR
(b) Proceeds of a fresh issue of shares made for the purposes of such redemption.

(Bare-text continuation truncated in source.)

Worked example

### Example 1

Example (Tenor): A company limited by shares issues redeemable preference shares on 1 April 2026. They must be redeemed on or before 31 March 2046 (20-year cap).

### Example 2

Example (Infrastructure project): A power generation company (listed in Schedule VI) issues 30-year preference shares for ₹100 crore on 1 April 2026. Starting from 1 April 2046 (21st year), at least 10% of these shares (i.e., ₹10 crore worth annually) must be redeemed each year at the option of preference shareholders, on proportionate basis.

### Example 3

Example (No default condition): XYZ Ltd has unpaid preference dividend of ₹5 lakh from FY 2024-25. It now proposes to issue fresh redeemable preference shares. The issue is NOT permitted until the dividend default is cured, because the company is in subsisting default on preference dividend.

⚠️ Common exam mistakes

Issuing irredeemable preference shares — strictly prohibited for a company limited by shares.
Forgetting that AOA must specifically authorise issuance of redeemable preference shares.
Treating the 20-year cap as universal — forgetting the special 30-year window for infrastructure projects.
Forgetting that the 10% annual redemption for infrastructure preference shares is at the OPTION of preference shareholders (not the company).
Issuing fresh preference shares while there is a subsisting default in redemption or preference dividend — violation of Section 55(2).
Confusing the source of funds for redemption — must be either distributable profits OR proceeds of a fresh issue.

Bare-Act text Section 55 · Companies Act, 2013 · click to expand

Section 55(1): No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable. Section 55(2): A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed: Provided that a company may issue preference shares for a period exceeding twenty years but not exceeding thirty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders.

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Issue and Redemption of Preference Shares (Section 55)

Worked example

⚠️ Common exam mistakes