Legal Eligibility to Issue Preference Shares

• Only JV companies incorporated as companies under the Companies Act can issue preference shares.
  
• Preference shares cannot be issued by JVs formed as LLPs, partnerships, or unincorporated entities.
  
• The issue of preference shares must be authorized by the company’s Articles of Association (AoA).
  
• The Board of Directors and shareholders must approve the issuance through appropriate resolutions.
  
• The issuance must comply with Section 55 and related rules of the Companies Act, 2013.
  

Features of Preference Shares

• Preference shares carry a fixed dividend rate and have priority over equity shares in dividend payments and return of capital.
  
• They may be redeemable or convertible, with redemption permitted only out of profits or fresh issue of shares.
  
• These shares may have voting rights only on matters affecting their rights or if dividends are unpaid for two years.
  
• Types include cumulative, non-cumulative, participating, non-participating, convertible, and non-convertible preference shares.
  
• The terms must be clearly defined in the issue resolution and offer documents.
  

Procedure for Issuing Preference Shares

• The company must convene a board meeting to approve the issue and call an extraordinary general meeting (EGM).
  
• A special resolution is passed by shareholders authorizing the issue of preference shares.
  
• A detailed term sheet or offer letter is prepared specifying the type, number, dividend rate, and redemption terms.
  
• Shares may be issued on a private placement basis, requiring filing of Form PAS-4 and PAS-3 with the Registrar of Companies (RoC).
  
• The company must maintain a register of preference shareholders and update the statutory records accordingly.
  

Regulatory and Compliance Requirements

• The issue of preference shares must comply with pricing, valuation, and reporting norms under company law and SEBI regulations (if applicable).
  
• If the JV has foreign partners, the issuance must comply with FEMA regulations and FDI policy, and may require filing Form FC-GPR with the RBI.
  
• Preference shares must be redeemed within 20 years, except for infrastructure projects where the limit is 30 years with periodic redemption.
  
• Tax implications such as dividend distribution tax (if applicable) or withholding tax for foreign investors must be considered.
  
• Non-compliance with procedural or regulatory norms may render the issue invalid and attract penalties.
  

Strategic Use of Preference Shares in JVs

• Preference shares offer a flexible financing option without diluting voting control.
  
• They are ideal when one partner wants a financial return without active participation in management.
  
• Used to structure layered investments, manage capital structure, or attract external investors.
  
• Rights and preferences must be aligned with the JV agreement, especially regarding exit, dividend distribution, and liquidation preferences.
  
• They can also be used in corporate restructuring, buyout negotiations, or bridge funding during project expansion.