12.6.7 (Cumulative Convertible Preference Shares)

The Government vide its guidelines dated 19^th August, 1985 permitted issue of another class of shares by public limited companies, called cumulative convertible preference shares.

The Guidelines issued by the Ministry of Finance in this regard are as follows:

            1. Applicability. The guidelines will apply to the issue of CCPs by public limited companies which propose to raise finance.

            2. Objects of the issue. The objects of the issue of the above instruments should be for any of the following purposes: (a) Setting-up of new projects; (b) Expansion or diversification of existing projects; (c) Normal capital expenditure for modernisation; and (d) Working capital requirements.

            3 . Quantum of issue. The amount of CCPs cannot exceed the equity shares offered to the public for subscription. However, in case of projects assisted by financial institutions, the quantum of issue would be approved by the financial institutions/ banks.

            4. Terms of issue. (i) CCPs would be deemed to be equity issue for the purpose of calculation of debt equity ratio as may be applicable; (ii) The entire issue of CCP would be convertible into equity shares between the end of 3 years and 5 years as may be decided by the company and approved by the Controller of Capital Issue CCI (Now, SEBI); (iii) The conversion of the CCP shares into equity would be deemed as being one resulting from the process of redemption of the preference shares out of the proceeds of a fresh issue of shares made for the purposes of redemption; (iv) The rate of preference dividend payable on CCP would be 10%*; (v) The guidelines in respect of preference shares regarding ratio of 1:3 as between preference shares and equity shares would not be applicable to this new instrument; (vi) On conversion of the preference shares into equity shares, the right to receive arrears of the dividend, if any, on the preference shares up to the date of conversion shall devolve on the holder of the equity shares on such conversion. The holder of the equity shares shall be entitled to receive the arrears of dividend as and when the company makes profit and is able to declare such dividend; (vii) The aforesaid CCP share would have voting rights as applicable to preference share under the Companies Act; (viii) The conversion of aforesaid preference shares into equity shares would be compulsory at the end of 5 years and the aforesaid preference shares would not be redeemable at any stage.

            5. Denomination of CCP. The face value of CCP share will ordinarily be Rs 100 each.

            6. Listing of CCP. CCP shares shall be listed on one or more stock exchange in the country.

            7. Articles of association of the company and resolution of the general body. The articles of association of the company proposing to issue CCPs should contain a provision for issue of such shares. Further, the company must submit with the application to the CCI (Now SEBI) a certified copy of a special resolution in this regard under s.81 (1A) of the Companies Act, duly passed in the general meeting of the company. This resolution must approve the issue of CCP shares and provide for compulsory conversion of the preference shares between the 3^rd to 5^th year, as the case may be.