1. Understand the Legal Framework
The issuance of NCRPS with an embedded call option by a private limited company is governed by:
- Companies Act, 2013, particularly Sections 55 (Preference Shares) and 62 (Further Issue of Share Capital).
- Companies (Share Capital and Debentures) Rules, 2014.
- SEBI Regulations may be applicable in case the company is listed or planning to list in the future.
- Income Tax Act, 1961 for taxation aspects related to dividends or redemption.
The call option, which gives the company the right to repurchase the shares before maturity, must also be legally structured and meet the required disclosure norms.
2. Internal Preparations
1. Board Approval: The company’s Board of Directors needs to approve the proposal to issue NCRPS with a call option. A Board Meeting should be convened to discuss the terms and conditions of the issuance, including:
- The face value of the preference shares.
- Tenure and redemption schedule.
- The coupon rate (dividend rate).
- Terms of the embedded call option (conditions under which the company can repurchase shares before maturity).
- Rights attached to the preference shares (voting, dividend preference, etc.).
2. Appointment of Professionals: Engage legal advisors, valuers, and merchant bankers (if necessary) to ensure compliance and accurate valuation of the shares. A registered valuer may be required for determining the fair value of the shares, especially if shares are issued at a premium.
3. Special Resolution at General Meeting
1. Call an Extraordinary General Meeting (EGM): Once the board approves the issuance, the company must convene an EGM of the shareholders to pass a Special Resolution under Section 55(2) and Section 62 of the Companies Act, 2013. The special resolution must:
- Authorize the issuance of NCRPS.
- Approve the terms of the embedded call option.
- Specify the number, face value, issue price, dividend rate, and terms of redemption.
2. File Special Resolution with Registrar of Companies (ROC): After passing the special resolution, the company must file Form MGT-14 with the Registrar of Companies (ROC) within 30 days of passing the resolution.
4. Offer Letter to Existing Shareholders (If Applicable)
If the NCRPS is offered to existing shareholders or third parties on a preferential basis, the company should comply with Section 62(1)(c) (Further issue of shares) of the Companies Act. The company will need to issue a detailed offer letter outlining the terms of the issue, including:
- The number of shares being offered.
- The method of acceptance.
- The timeframe for subscribing.
The offer letter must be in line with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014.
5. Valuation and Pricing of Shares
1. Valuation: The NCRPS must be issued at a fair value determined by a registered valuer to ensure compliance with pricing guidelines.
2. Pricing Considerations: The price at which the NCRPS is issued should reflect the terms of the embedded call option. The company must calculate the impact of the call option on the pricing of the shares, considering factors like interest rates, time to maturity, and dividend payout. Typically, a financial advisor or investment banker is engaged to value the call option embedded in the preference shares.
6. Private Placement Process
If the shares are being issued via private placement, the company must comply with the procedures outlined in Section 42 of the Companies Act, 2013, and the Companies (Prospectus and Allotment of Securities) Rules, 2014:
1. Issue a Private Placement Offer Letter (PAS-4): A detailed offer letter needs to be prepared and delivered to potential subscribers.
2. Open a Separate Bank Account: The company must open a separate bank account where the subscription money will be credited.
3. File Private Placement Offer with ROC: File PAS-3 (Return of Allotment) with the ROC within 15 days of allotting the shares.
7. Allotment of Shares
A. Once the subscription money is received, the company should allot the shares by passing a resolution at a board meeting. The company needs to ensure the NCRPS are fully paid-up as per the agreed terms.
B. File Return of Allotment: After the allotment is completed, the company must file PAS-3 (Return of Allotment) with the ROC within 15 days of the allotment.
8. Issuance of Share Certificates
- The company should issue share certificates to the subscribers within two months of allotment. These certificates will include the terms of redemption and details of the embedded call option.
9. Call Option Terms
The call option, which allows the company to redeem the NCRPS before the due redemption date, must be clearly stated in the shareholder agreement and offer document. Terms such as:
- The conditions under which the company can exercise the call option.
- The time period for exercising the option.
- The pricing mechanism (if different from par value or face value) for the call option.
Ensure that these terms comply with Section 55 of the Companies Act, which specifies that redeemable preference shares must be redeemed within a period not exceeding 20 years from the date of issue.
10. Compliance with Tax Laws
The company must be mindful of the tax implications of the dividends paid on NCRPS and the treatment of the proceeds from redemption. Consultation with a tax advisor is recommended to ensure compliance with the Income Tax Act, 1961.
11. Record-Keeping and Post-Issue Filings
1. Register of Preference Shares: Maintain a proper register of preference shares as per the Companies Act, recording all details of the issuance, including the terms of the embedded call option.
2. Annual Filings: Ensure that the issuance and redemption of the NCRPS are disclosed in the company’s annual returns and financial statements, as required by law.
12. Redemption Process
Upon the maturity or exercise of the call option, the company must redeem the NCRPS as per the terms specified at the time of issuance. The redemption can only be done out of:
- Profits of the company available for dividend distribution.
- Proceeds from a fresh issue of shares specifically made for redemption.
The redeemed shares must be canceled, and the company should file relevant forms with the ROC (such as SH-7 for changes in share capital) after redemption.
Conclusion
Issuing Fully Paid Non-Convertible Redeemable Preference Shares with an embedded call option requires a detailed understanding of the regulatory framework and careful compliance with procedural and disclosure norms. It is advisable to ensure that the structure of the issuance, including the call option, complies with all applicable laws and regulations.
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