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

following post is contributed by Nivedita Shankar of Vinod Kothari & Co.
She can be contacted at [email protected]]
In continuation to its press note PR No.
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,
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.
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
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

public company, PSU, statutory corporation

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

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

Offer document
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


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.
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.
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
4. draft and final offer document to be
forwarded to SEBI and designated stock exchange simultaneosly.
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
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
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;
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
Regulations, 2013 allow issuers to provide the facility of electronic mode for
subscription of applications.
Other requirements
1. Price of non-convertible redeemable
preference shares may be at a fixed price or determined through book building
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
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.
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.
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.
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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • 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

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