1. No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable.
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: shares.
Provided that: a company may issue preference shares for a period exceeding twenty 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:
Provided further that:
a. no such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption;
b. no such shares shall be redeemed unless they are fully paid;
c. where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and
i. in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed:
Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed.
ii. in a case not falling under sub-clause (i ) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed.
3. 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.
4. The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
Explanation.- —For the purposes of sub-section (2 ), the term "infrastructure projects" means the infrastructure projects specified in Schedule VI.
Legal Commentary & Landmark Judgments: Section 55
Section 55 governs the issuance, tenure, and mandatory redemption of preference shares, prohibiting irredeemable preference shares and regulating Capital Redemption Reserve Accounts (CRRA).
When redeemed out of profits, a sum equal to the nominal amount of shares redeemed must be transferred to the Capital Redemption Reserve Account (CRRA).
Section 55 strikes a balance between investor yield and capital maintenance. The Capital Redemption Reserve Account created upon redemption enjoys the same statutory protection as paid-up capital and can be utilized only for paying up unissued shares to be issued as fully paid bonus shares. If a company is unable to redeem preference shares or pay dividends, it must seek NCLT approval to issue further redeemable preference shares under Section 55(3).