Wednesday, June 26, 2013

SEBI gives preference shares a new direction – issues regulations for non-convertible preference shares

[The following post is contributed by Nivedita Shankar of Vinod Kothari & Co. She can be contacted at]

In continuation to its press note PR No. 27/2013[1], the market regulator Securities Exchange Board of India (“SEBI”) has notified the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013[2] (“Regulations, 2013”) on June 12, 2013.


Previously, the following two regulations were issued by SEBI for issue and listing of securities:

1. Securities And Exchange Board Of India (Issue and Listing of Debt Securities) Regulations, 2008 which is applicable to non-convertible debt securities which create or acknowledge indebtedness i.e. debentures, bonds;

2. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 which is applicable to convertible securities only.

Thus, there were no regulations to govern the issue and listing of Non-Convertible Redeemable Preference Shares (“Preference Shares”) and with Regulations, 2013, SEBI has tried to fill the gap.


The Regulations, 2013 are applicable to:

1. public issuance of Preference Shares.

2. listing of privately placed Preference Shares issued through public issue or on private placement basis.

3. issuance and listing of Perpetual Non-Cumulative Preference Shares and Innovative Perpetual Debt Instruments by banks. Such instruments shall be made subject to the prior approval and in compliance with the guidelines issued by Reserve Bank of India.

Thus, effectively, the essence of Regulations, 2013 is to:

a. provide for listing of preference shares which are offered to public

b. permit listing of preference  shares which are though privately offered, but may be listed.


Regulations, 2013 define them as:

means a preference share which is redeemable in accordance with the provisions of the Companies Act, 1956 and does not include a preference share which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder”

However, pursuant to Section 87(2)(b) of the Act, in case of non-payment of dividend in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of not less than three years comprised in the six years ending with the expiry of the financial year aforesaid, such preference shares shall attain voting rights. Thus, keeping the Act and Regulations, 2013 in perspective, in case issuing companies fail to pay dividend, such Preference Shares shall carry voting rights, but shall be non-convertible.


Any public company, PSU, statutory corporation

As defined in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

Public issue
Means offer or invitation to public to subscribe which is not private placement

Offer document
Prospectus and includes any such document or advertisement whereby the subscription to non-convertible redeemable preference shares are  invited by the issuer from public;

"Part of the same group" and "under the same management"
As in explanation to regulation 23 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This is provided in Regulation  4


The Regulations, 2013 has listed down the pre-requisites for making public issue, being listed below:

1. the company has obtained in-principle approval for listing of Preference Shares on the recognized stock exchanges.

2. Credit rating of not less than “AA-“ by a SEBI registered credit rating agency. Such ratings shall be disclosed in the offer document.

3. Minimum tenure of 3 (three) years.

4. Issuer to create a capital redemption reserve in accordance with Companies Act, 1956 (“Act”).

5. Appoint one or more merchant bankers registered with SEBI.

Issuer shall not issue Preference Shares for providing loan to or acquisition of shares of any person who is part of the same group or who is under the same management, other than to subsidiaries of the issuer.


A.            Disclosures in offer document

1. disclosures as in Schedule II of the Act and Schedule I of Regulations, 2013

2. all material disclosures necessary to make an informed decision.

B.             Filing of draft offer document

1. prior to this, due diligence certificate to be issued as per Schedule II of Regulations, 2013

2. draft offer document to be filed by lead merchant banker and posted on the website of designated stock exchange

3. all comments received on draft offer document to be addressed before filing of offer document with Registrar of Companies

4. draft and final offer document to be forwarded to SEBI and designated stock exchange simultaneosly.

C.             Advertisements for public issues

1. Issuer to make advertisement in one English national daily newspaper and one Hindi national daily newspaper with wide circulation at the place where the registered office of the issuer is situated, on or before the issue opening date.

2. The advertisement shall urge the investors to invest only on the basis of information contained in the offer document.

3. Any corporate or product advertisement issued by the issuer during the subscription period shall not make any reference to the issue of non-convertible redeemable preference shares or be used for solicitation

D.            Abridged Prospectus and application forms

It shall be the duty of the issuer and lead merchant banker to ensure that:

1. every application form issued by the issuer is accompanied by a copy of the abridged prospectus;

2. the abridged prospectus shall not contain matters which are extraneous to the contents of the prospectus;

3. adequate space shall be provided in the application form to enable the investors to fill in various details like name, address, etc

The Regulations, 2013 allow issuers to provide the facility of electronic mode for subscription of applications.

E.             Other requirements

1. Price of non-convertible redeemable preference shares may be at a fixed price or determined through book building process.

2. Issuer to decide the amount of minimum subscription. On non-receipt of the same, all application money are to be refunded. Interest shall be levied @15% p.a. in case the application money are refunded after 8 (eight) days from the last day of offer.

3. The issue can also be underwritten and in such a case sufficient disclosures regarding underwriting arrangements shall be made in the offer document.


With Regulations, 2013 prescribing companies to get Preference Shares listed, it opens up additional avenue for listing, not only for Indian residents, but also for foreign investors. However, the extant norms relating to foreign direct investment in India, does not allow Indian companies to issue non-convertible preference shares to foreign investors. In fact para 3.3.2 of the Consolidated FDI Policy issued by Department of Industrial Policy and Promotion effective from April 5, 2013, any issue of non-convertible preference shares shall be taken to be debt and accordingly, norms relating to External Commercial Borrowings shall be applicable.

The Regulations, 2013 prescribe mandatory listing for all issuers making public offer.


1. Preference Shares are in dematerialized form

2. Minimum application size for each investor is not less than Rs. 10 lakhs.

3. Disclosures to be made as specified in Schedule I of Regulations, 2013 like Memorandum and Articles of Association, audited annual reports, date and parties to all material contracts. Detailed information regarding the issuer to be also provided as in Schedule I.


The Regulations, 2013 have also laid down conditions for trading of preference shares whereby, the shares shall be traded and such trades shall be cleared and settled in recognized stock exchanges. In case of OTCs, such trades shall be reported on a recognized stock exchange.


SEBI has been empowered to:

1. To appoint one or more persons to undertake the inspection of the books of account, records and documents of the issuer or merchant banker for purpose such as:

a. Verify compliance with provisions of Act, Securities Contracts (Regulation) Act, 1956, Depositories Act, 1996, Regulations, 2013 and allied rules if any.

b. to inquire into affairs of the issuer in the interest of investor protection

c. issue directions like prohibiting issuer from dealing in securities, direction to sell or divest securities, directing the issuer or the depository not to give effect transfer or directing further freeze of transfer of securities.

2. To issue clarifications or grant relaxations from application requirement.


What is conspicuously missing in Regulations, 2013 is any penal provision. It is thus, understood that penal provisions as in SEBI Act, 1991 will be applicable. In the coming months, we can also expect RBI to come up with its own set of regulations for banks as applicable under Regulations, 2013. The Regulations, 2013 however has given HNIs a reason to rejoice with SEBI giving them one more avenue to invest. With regulations being issued and reports indicating that Indian companies have raised over Rs 25,000 crore through preference share issuance in the last three years[3], this trend can be expected to catch up.

- Nivedita Shankar

1 comment:

Anonymous said...

Thanks for such a good write up. Just to add a bit, the Schedule I which states the Disclosures to be made in the Offer Document lays down the following penal provisions:

1. In case of default in payment of Dividend and/or principal redemption on the due dates, with additional Dividend of at least @ 2% p.a. over the dividend rate will be payable by the Company for the defaulting period

2. In case of delay in listing of the non-convertible redeemable preference shares beyond 20 days from the deemed date of allotment, the Company will pay penal amount of at least 1 % p.a. over the dividend rate from the expiry of 30 days from the deemed date of allotment till the listing of such non-convertible redeemable preference shares to the