Let's Get The Preference Right

Had this column been written before December 2000, a clear conclusion would have been that a public limited company cannot issue equity shares of different classes while it could issue preference shares of different classes.

This is because, pre-December 2000, there was Section 88 in the Companies Act, 1956, which prohibited companies from issuing equity shares with disproportionate rights with respect to dividend or voting right or in any other manner.

The language used in Section 88 was such that it exempted preference shares from this restriction, which meant that preference shares with disproportionate rights could be issued. For example, two classes of preference shares (Class A and Class B) could be issued, with one class enjoying seniority or superiority over the other class in the payment of dividend during the lifetime of the company or in the liquidation proceeds in the event of the company winding up.