Deemed Redemption of Preference Shares (Section 55(3))
# Deemed Redemption of Preference Shares
## When Does Section 55(3) Apply?
Where a company is not able:
to redeem its preference shares, OR
to pay dividend on such shares (if any)
…in accordance with the terms of issue, the section provides a relief mechanism.
## Procedure for Deemed Redemption
### Step 1: Obtain Consent
Company must obtain consent of holders of 3/4th in value of such preference shares.
### Step 2: Approach Tribunal (NCLT)
With the said consent, the company files a petition to the Tribunal seeking approval for issue of further preference shares.
### Step 3: Issue of Further Redeemable Preference Shares
On approval, the company may issue further redeemable preference shares equal to the amount due (unredeemed PS + dividend, if any).
### Step 4: Deemed Redemption
On such issue, the unredeemed preference shares shall be deemed to have been redeemed.
## Protection for Dissenting Shareholders
The Tribunal shall order forthwith redemption of preference shares held by any person who did not consent to the issue of further preference shares.
## Important Carve-Out
Such issue or redemption shall not be treated as increase or reduction of share capital of the company. Therefore, Section 66 (reduction of share capital) and the variation in capital provisions shall not apply.
Worked example
### Example 1
Example: PQR Ltd. issued 10,00,000 preference shares of ₹10 each redeemable in 2026. Due to liquidity issues, the company cannot redeem them.
It obtains consent of holders of 3/4th in value (say 7,50,000 shares).
Files petition before NCLT for approval to issue fresh redeemable PS to replace the unredeemed.
On NCLT approval and issue, the old PS are deemed redeemed.
The 25% who did NOT consent: NCLT will direct PQR Ltd. to redeem their shares forthwith (immediately).
⚠️ Common exam mistakes
Thinking ordinary resolution suffices — actually consent of 3/4th in value of the preference shareholders is required (not the equity shareholders).
Forgetting that NCLT approval is mandatory in addition to shareholder consent.
Treating this issue as a fresh capital increase requiring compliance with Section 61/66 — Section 55(3) specifically excludes this.
Overlooking that dissenting shareholders are entitled to forthwith redemption — the company cannot force them to accept replacement PS.
Bare-Act text Section 55(3) · Companies Act, 2013 · click to expand
Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this 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: Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares. Explanation.—For the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company.