# 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/optionally; partially/fully) / Non-convertible
Redemption	Redeemable / Irredeemable (cannot be issued)

## Prohibition on Irredeemable Preference Shares [Section 55(1)]

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

## Conditions for Issue & Redemption [Section 55(2)]

### 1. Authorisation by Articles

Issue of redeemable preference shares must be authorised by the AOA.

### 2. Maximum Tenure — 20 Years

Preference shares must be redeemed within a period not exceeding 20 years from the date of issue.

### 3. Conditions for Issue

A special resolution in general meeting must be passed.
At the time of issue, the company must NOT have a subsisting default in —
Redemption of preference shares, OR
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 preference shareholders.

### 5. Listing

If preference shares are to be listed, comply with SEBI regulations.

## Exception — Infrastructure Projects (Schedule VI)

For infrastructure projects specified in Schedule VI, a company may issue preference shares 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 proportionate basis, at the option of preferential shareholders.

## Redemption — Conditions [Second Proviso to Section 55(2)]

Preference shares may be redeemed only out of permitted sources (continued in next chunk — typically profits available for dividend, or proceeds of a fresh issue of shares).

Worked example

### Example 1

Example 1 — Tenure limit:

ABC Ltd (a manufacturing company) wishes to issue preference shares for 25 years. This is NOT permitted — maximum tenure is 20 years (the 30-year exception applies only to infrastructure projects under Schedule VI).

### Example 2

Example 2 — Infrastructure exception:

XYZ Ltd, engaged in a Schedule VI infrastructure project, issues 1,00,000 preference shares for a 30-year term on 1 April 2026. Beginning from year 21 (i.e., from 2046), at least 10,000 shares (10%) must be redeemed annually, at the option of preferential shareholders, on a proportionate basis.

### Example 3

Example 3 — Default at time of issue:

PQR Ltd has subsisting default in payment of preference dividend on existing preference shares. It cannot issue fresh preference shares until the default is cleared.

⚠️ Common exam mistakes

Believing irredeemable preference shares can be issued under certain conditions — they CANNOT be issued at all (Section 55(1) absolute prohibition).
Applying the 30-year tenure to all companies — it applies only to Schedule VI infrastructure projects.
Forgetting that special resolution is mandatory for issue.
Forgetting that the company must not have subsisting default in redemption or dividend on existing preference shares at the time of fresh issue.
Forgetting that 10% annual redemption (from 21st year) is mandatory for the infrastructure 30-year exception.
Confusing 'authorised by articles' (for issue) with 'authorised by special resolution' (for terms) — both are required.

Bare-Act text Section 55 · The 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