Redeemable preference shares are a unique financial instrument that behave like a combination of equity and debt. They provide a means for companies to raise money for a medium time period and pay investors a predetermined return—like interest—without losing too much control over ownership.
When designed properly, these shares can help companies improve their balance sheet ratios, provide investors with steady and predictable returns, and give businesses more flexibility in managing their capital.
In this article, we’ll break down the key legal, accounting, tax, and regulatory aspects of redeemable preference shares, especially in light of recent government circulars and rule changes.
In this changing financial landscape of the present, redeemable preference shares are finding more and more applications among established corporates as well as rapidly growing firms. As borrowing costs increase and credit markets become more constrained, corporations are opting for structured equity-like products to satisfy funding requirements without assuming too much debt. Redeemable preference shares bridge this gap quite well—they give investors the security of fixed returns and an exit, while issuers gain less dilution and more flexible terms of redemption. As issuers and investors grow more sophisticated, and as regulations become more facilitative, the application of redeemable instruments extends beyond traditional sectors to technology, infrastructure, and services, and they become a central component of innovative capital-raising strategies.
Definition and legal nature
A redeemable preference share is a preference share issued under an obligation (or right) to be repaid at a future date or on the occurrence of specific events by the company. A redeemable preference share in company law is a share (equity in form) but with priority rights with respect to dividend and repayment of capital. Practice-wise, redeemable preference shares have aspects of both debt (fixed term/return) and equity (ownership, restricted voting).
Types and general characteristics
Brief categorization:
- Cumulative vs non-cumulative (dividend accrual).
- Participating vs non-participating (right to surplus).
- Convertible vs non-convertible (conversion affects dilution).
- Redeemable vs irredeemable (most jurisdictions statutorily require redemption within a stipulated maximum period).
Functionally, redeemable preference shares typically state: redemption date/term, redemption price (face or premium), dividend rate, ranking on winding-up, and conversion or call terms.
Mechanics of issue and redemption (statutory environment)
Important legal considerations :
- Statute determines maximum tenor of redemption as well as procedural arrangements (creditor protection, solvency/board/shareholder approvals). In most jurisdictions, the company will need to be solvent and meet stipulated notice/filing requirements on redemption.
- Issuance is expected to meet requisite form filings with the registrar upon redemption and to follow disclosure norms for public issues. Recent regulator clarification has shortened operating timescales for listed issuances.
SEBI-level reforms for listed instruments have included reduced denomination criteria and accelerated listing dates for instruments like non-convertible redeemable preference instruments — measures designed to boost market access and tradability for preference shares redeemable instruments.
Accounting and capital classification:
From a balance sheet perspective:
- For accounting standards, classification differs according to contractual terms — fixed redemption and fixed dividend obligations have the tendency to push classification into liability-like treatment under certain frameworks but legal form as shares is able to preserve equity presentation under subject standards.
- For banks etc., central bank guidelines usually classify redeemable preference securities as Tier II capital with amortization guidelines for use on maturity attainment. RBI guidelines clearly suggest progressive discounting on such securities when introduced into the capital adequacy, considering their reduced loss-absorbing ability near maturity.
Issuers need to pay the relevant accounting standard interpretation in due time — misclassification affects ratios, covenants and investor perception.
Tax and regulatory interfaces (recent events)
Recent, concise evolution that has material implications for structuring:
- SEBI circulars (2023–2024): SEBI has come out with circulars that lower the minimum investment threshold and accelerate the listing process for non-convertible redeemable instruments. These revisions facilitate easier and quicker issuance of redeemable preference shares to the public by companies. Companies intending to raise funds in this manner will now be required to make easier disclosure documents, use brief prospectus formats, and comply with the new, quicker time frames laid down by SEBI.
- Income tax / capital gains regime: Recent tax legislation amendments (Finance Act amendments) altered long-term capital gains calculation and tax treatment of certain instruments and buybacks; this impacts investors in preference shares redeemable on transfer in comparison with redemption may result in varying tax positions. Advisers need to relate instrument specifics to updated capital gains regulations and withholding conditions.
- Ministry of companies and filings: Notifications and rules changing forms and accounting disclosure under Companies (Accounts) Rules have been changed; recent rule modifications have emphasized compliance with redemption filing and note disclosure in financial statements.
This change in regulation shows an ecosystem push to improve marketability of redeemable preference shares while making it more disclosure and process-compliant.
Going forward, the popularity of redeemable preference shares is likely to increase as corporates reconcile the desire for long-term leverage with investor needs for stable returns. Regulators are also promoting transparency and liquidity, which makes such instruments more popular with a broader base of investors. For issuers, success in marketing such instruments will hinge on robust governance, careful drafting of redemption provisions, and consistency with accounting and taxation guidelines right at the outset. For investors, clarity on the redemption schedule, dividend entitlements, and marketability will be critical to assessing risk and reward. With careful structuring, redeemable preference shares can graduate from a specialty funding instrument to a mainstream vehicle intermediate between equity and debt.
Strategic applications by issuers and investors
Issuers:
- Raise fixed-tenor capital without initial equity dilution.
- Underkeep dividend flexibility (cumulative vs non-cumulative).
- Maximize gearing and achieve specific covenant levels (if categorized outside of certain equity parameters).
Investors:
- Seniority-seeking securities yield.
- Tailored exit timing through redemption schedule.
- Amplify up potential conversion upside where conversion features exist.
Therefore, preference shares redeemable are attractive in focused capital strategies (project finance bridge, refinancing, structured growth capital) where regular repayment and limited governance rights are tolerable.
Key Risks and Regulatory Challenges
Important key points:
- Redemption without statutory procedure: Enforcement action (registrar/ROC penalties) has been seen where companies failed to file redemption notices or failed to follow regulatory intimation timelines — an enforceability risk directly for any issuer of redeemable preference shares.
- Misclassification: Inaccurate accounting/tax classification can result in retrospective corrections and tax disputes.
- Liquidity risk: Non-convertible securities are less liquid except where listed — in spite of regulatory efforts to make redeemable preference shares more tradable.
Operationally, robust record keeping, pre-mature cash flow planning for redemption, and coordination with investor communications negate pitfalls.
Practical checklist for writing terms (concise)
- Specify detailed redemption mechanics: date(s), price formula, put/call triggers.
- Dividend clause: cumulative/non-cumulative and compounding (if any).
- Liquidation and subordination wording ranking.
- Conversion rights (where applicable) and anti-dilution protections.
- Filing and reporting obligations timeline (ROC/stock exchange/SEBI).
- Tax gross-up/withholding and investor representations.
- Remedies and events of default (including redemption acceleration).
- Solvency and board approval conditions for redemption.
This checklist eliminates confusion and makes the instrument function as required under accounting, tax and regulator's eyes — a must for any redeemable preference shares issuance.
Conclusion — when to use this instrument
Redeemable preference shares are a good compromise between debt and equity if an issuer has fixed-tenor capital needs without instant dilution, and if investors want certain return with little governance exposure. Recent regulatory efforts (SEBI circulars concerning denomination and time of listing, companies-law and accounting revisions and modifications in tax laws) have increased commercial efficiency of these instruments but also raise compliance and disclosure levels. Serious drafting, pre-taxing and accounting synchronization, and stern procedural stringency on filing of redemptions are non-negotiable to achieve the sought-after advantages without offending enforcement or tax litigations