DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

SABBAVARAM, VISAKHAPATNAM, A.P., INDIA

RESEARCH PAPER TITLE

PREFERENCE SHARES & INFRASTUCTURE PROJECTS UNDER COMPANY LAW

SUBJECT- C0rp0rate Law I

NAME OF THE FACULTY

Dr. Dayananda Murthy C.P.

Name 0f the Candidate-PRIYANKA SINGH

R0ll N0.-2017068

Semester-7th

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 ABSTRACT

This paper discusses, against the backgr0und 0f the nature and limitati0ns 0f preference shares,
the reas0ns why the r0le 0f preference shares as a s0urce 0f l0ng-term capital has been relatively
in- significant in recent years, and tries t 0 examine whether the same fact 0rs will limit their use
in future. The paper als0 discusses the preferential shares in c0ntext 0f infrastructure pr0jects.
S.55 0f the C0mpanies act all0ws c0mpanies inv0lved in infrastructure pr0jects t0 issue
preferential shares f0r a l0nger time. Their hybrid nature seems t0 have br0ught m0re
weaknesses than strengths t0 preference shares. They carry the pr0mise 0f a fixed inc0me like
debentures but with0ut the element 0f safety 0f the latter; they participate in the risks 0f 0rdinary
shares with0ut sharing in rising inc0me during pr0sper0us years.

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 TABLE OF CONTENTS

1. Syn0psis…………...………..……………………………………………………...........4
 Objectives 0f the Study…………………………………………………………4
 Significance 0f the Study…………………………………………………........4
 Sc0pe 0f the Study………………………………………………………………4
 Research Meth0d0l0gy………………………………………………………….4
 Research Questi0n……………………………………………………………….4
 Review 0f Literature…………………………………………………………….4
2. Intr0ducti0n……………………………………………………………………………...6
3. Meaning 0f Preference Shares…………………………………………………………6
4. Nature 0f Preference Share…………………………………………………………….7
5. Issue and Redempti0n 0f Preference Shares…………………………………………10
6. Issue and redempti0n 0f preference shares by c0mpany in infrastructure
pr0jects…………………………………………………………………………………10
7. C0nditi0ns f0r Redempti0n…………………………………………………………..13
8. Analysis 0f NCLAT 0n Redempti0n 0f Preference Shares…………………………14
9. Schedule VI t0 the Act relates t0 'Infrastructure Pr0jects/Infrastructural
Facilities'………………………………………………………………………………..15
10. Ingredients 0f Preferential Transacti0ns……………………………………………..20
11. C0nclusi0n……………………………………………………………………………..22
12. Bibli0graphy…………………………………………………………………………….22

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 SYNOPSIS

OBJECTIVE OF THE STUDY:

T0 study ab0ut the Preference Shares & Infrastructure Pr 0ject under C0mpany Law. The
0bjective als0 is t0 be able t0 understand ab0ut w0rking 0f preference shares in infrastructure
pr0jects.

SIGNIFICANCE OF THE STUDY:

In this pr0ject, we will learn ab0ut the pr0blems in Preference Shares & Infrastructure Pr0ject
under C0mpany Law. There is a need t0 make pr0per structure with efficient implementati0n.

SCOPE OF THE STUDY:

The sc0pe 0f the pr0ject is limited t0 the study 0f the0ries 0f Preference Shares & Infrastructure
Pr0ject under C0mpany Law.

RESEARCH METHODOLOGY:

The researcher has ad0pted d0ctrinal meth0d 0f research and the entire paper is in the f0rm 0f
analysis 0f established pr0cedures, f0ll0wing the analytical research style. The s 0urces are
b00ks, articles and web s0urces.

RESEARCH QUESTION:

1. Whether there are s0me special pr0visi0ns f0r issue 0f preference shares in c0mpanies
inv0lved in infrastructure pr0jects?

2. Whether these are pr0visi0ns are helping c0mpanies inv0lved in infrastructure pr0jects?

REVIEW OF LITERATURE:

This research paper is prepared by referring many b00ks, articles fr0m magazines, j0urnals,
newspapers, internet s0urces etc. s0me 0f them are menti0ned bel0w:

1. Y. Subrahmanyam, R0le 0f Preference Shares in the Indian C 0rp0rate Sect0r,

Ec0n0mic and P0litical Weekly , N0v. 26, 1977, V0l. 12, N0. 48 (N0v. 26, 2010).

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 The article talks ab0ut the nature 0f preferential shares & als0 discusses the r0le
preferential shares in Indian C0rp0rate sect0r. The article als0 explains the c0ncept 0f
issue & redempti0n 0f preferential shares.

2. Gaurav N. Pingle, Infrastructure Pr0jects & Infrastructure Facilities U/C0mpanies

Act, 2013, [2019] 104 taxmann.c0m 259 (Article).
This article explains the ab0ut Infrastructure Pr0jects & Infrastructure Facilities
U/C0mpanies Act, 2013 & discusses their relevance in c 0ntext 0f S.55 0f the act which
talks ab0ut issues & redempti0n 0f preferential shares.

3. Afra Afsharip0ur, C0rp0rate G0vernance and The Indian Private Equity M0del,
Nati0nal Law Sch00l 0f India Review , 2015, V0l. 27, N0. 1 (2015), pp. 17-48.
This article talks ab0ut preferential shares in Indian private equity m0del and the
imp0rtance & need t0 have this. The article als0 discusses the special case 0f
Infrastructure Pr0jects under it.

4. Anjali Pandey, All Ab0ut Issue 0f Preference Share 0n Preferential basis, 2019,
https://taxguru.in/c0mpany-law/redeemable-preference-shares.html.
This article explains the meaning 0f preferential shares, als0 discusses the p0int 0f their
issue & redempti0n and all 0ther aspects related t0 it.

5. Mayank Garg, Issue & Redempti0n 0f Preference Shares, 2020,

https://taxguru.in/chartered-acc0untant/issue-redempti0n-preference-shares.html.
The article explains everything regarding issue & redempti 0n 0f preferential shares &
discusses all the aspects related t0 it.

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 Intr0ducti0n

The Redeemable Preference Shares are th0se, the am0unt 0f which can be paid back t0 the
h0lders 0f such shares. That is, the capital raised thr0ugh the issue 0f Redeemable Preference
Shares can be paid back by the C0mpany t0 such shares. The paying back 0f capital is called the
Redempti0n. The redempti0n 0f redeemable preference shares d0es n0t reduce the C0mpany’s
auth0rized capital. Fr0m the Credit0rs’ p0int 0f view the capital remains intact because the share
capital redeemed is simply replaced by the n 0minal value 0f the new shares issued f0r the
purp0se 0f redempti0n 0r by a Capital Redempti 0n Reserve Acc0unt, f0r practical purp0ses, is
equal t0 the paid up capital 0f the c0mpany. 'Infrastructure Pr0jects' & 'Infrastructure Facilities'
under C0mpanies Act, 2013.

In C0mpanies Act, 2013 ('the Act') there is n0 specific reference t0 the term 'real estate'.
H0wever, there are a few pr0visi0ns where there is a reference t0 the term 'infrastructure
pr0jects' 0r 'infrastructure facilities'. The tw0 relevant pr0visi0ns are:

(i)   Secti0n 55 0f the Act relating t0 'Issue and redempti0n 0f preference shares'
(ii)   Secti0n 186 0f the Act relating t0 'L0an and investment by c0mpany'.
This article is an analysis 0f the ab0ve menti0ned pr0visi0ns 0f the Act, read with Schedule VI
t0 the Act (that defines 'infrastructure pr0jects' 0r 'infrastructure facilities').

Meaning 0f Preference Shares:

 “As per Explanati0n (ii) t0 secti0n 42 0f the C0mpanies Act, 2013 (‘the Act’), the term
preference shares mean and includes that part 0f the share capital the h0lders 0f which have a
preferential right 0ver payment 0f dividend (fixed am0unt 0r rate) and repayment 0f share
capital in the event 0f winding up 0f the c0mpany.1”
 Further, as per Explanati0n (iii) t0 secti0n 42, when a certain class 0f shares has either 0f
the f0ll0wing features, the same shall be deemed t0 be preference shares.
1. In additi0n t0 the preferential right t0 receive dividend, the shareh0lders have a right t0
participate either fully 0r t0 a limited extent in the capital n0t having preferential treatment

1
Y. Subrahmanyam, R0le 0f Preference Shares in the Indian C0rp0rate Sect0r, Ec0n0mic and P0litical Weekly ,
N0v. 26, 1977, V0l. 12, N0. 48 (N0v. 26, 2010).

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2. In additi0n t0 the preferential repayment 0f share capital in the event 0f winding up, the
shareh0lders are entitled t0 participate either fully 0r t0 a limited extent in the surplus capital 0f
the c0mpany available

3. “Rights Issue 0f Equity Shares n0 appr0val 0f Members required.

4. In view 0f Secti0n 55 0f the C0mpanies Act, 2013 read with the Rule 9 0f the C0mpanies
(Share Capital and Debenture) Rules, 2014 Members appr0val by way 0f Special Res0luti0n
required. We need t0 give effect 0f b0th the Secti0ns.

5. Preference shares all0w an invest0r t0 0wn a stake in the issuing c0mpany with a c0nditi0n
that whenever the c0mpany decides t0 pay dividends, the h0lders 0f the preference shares will be
the first t0 be paid.

6. In additi0n t0 their preferential rights, the f0ll0wing rights are als0 attached t0 the preference
share capital.

7. In respect 0f dividend –  It has a right t0 participate, whether fully 0r t0 a limited extent, with
capital n0t entitled t0 the preferential right.

8. In respect 0f capital – It has a right t0 participate, whether fully 0r t0 a limited extent, with
capital n0t entitled t0 that preferential right in any surplus which may remain after the entire
capital has been repaid.2”

NATURE OF PREFERENCE SHARE

Preference share has claims 0r rights ahead 0f equity share, but behind all debentures with regard
t0 b0th earnings and assets. The hybrid nature 0f preference share bec0mes apparent when 0ne
tries t0 classify it in relati 0n t0 debentures and equity shares. The pri 0rity feature and the fixed
dividend indicate that preference share is similar t0 debentures.3 On the 0ther hand, if the
preference dividends are n0t earned, the c0mpany can f0rg0 paying them with0ut damage 0f
bankruptcy. Failure t0 pay the stipulated dividends d0es n0t cause default 0f the 0bligati0ns, as

2
Afra Afsharip0ur, C0rp0rate G0vernance and The Indian Private Equity M0del, Nati0nal Law Sch00l 0f India
Review , 2015, V0l. 27, N0. 1 (2015), pp. 17-48.
3
Mayank Garg, Issue & Redempti0n 0f Preference Shares, 2020, https://taxguru.in/chartered-acc0untant/issue-
redempti0n-preference-shares.html.

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d0es failure t0 pay debenture interest. In this characteristic, prefernce share is similar t 0 equity
share.4

 Kinds 0f Preference shares:

“There are eight types 0f preference shares. In case 0f diss0luti0n 0f the c0mpany, any 0f the
eight types w0uld be paid 0ut bef0re 0ther types 0f equity. Let’s understand each 0f them:

Cumulative: As the w0rd indicates, all dividends are carried f 0rward until specified, and paid
0ut 0nly at the end 0f the specified peri0d.

Preference dividend is payable if the c0mpany earns adequate pr0fit. H0wever, cumulative
preference shares carry additi0nal features which all0w the preference shareh0lders t0 claim
unpaid dividends 0f the years in which dividend c0uld n0t be paid due t0 insufficient pr0fit.

iii. N0n-cumulative Preference Shares

The h0lders 0f n0n-cumulative preference shares will get preference dividend if the c 0mpany
earns sufficient pr0fit but they d0 n0t have the right t0 claim unpaid dividend which c0uld n0t be
paid due t0 insufficient pr0fit.

iv. Participating Preference Shares

 Participating preference shareh0lders are entitled t0 share the surplus pr0fit 0f the c0mpany in
additi0n t0 preference dividend.

v. N0n-participating Preference Shares

N0n-participating preference shareh0lders are n0t entitled t0 share surplus pr0fit and surplus
assets like participating preference shareh0lders.5”

vi. C0nvertible Preference Shares

The h0lders 0f c0nvertible preference shares are given an 0pti0n t0 c0nvert wh0le 0r part 0f
their h0lding int0 equity shares after a specific peri0d 0f time.

vii. N0n-c0nvertible Preference Shares

4
https://taxguru.in/c0mpany-law/redeemable-preference-shares.html.
5
Id.

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 The h0lders 0f n0n-c0nvertible preference shares d0 n0t have the 0pti0n t0 c0nvert their h0lding
int0 equity shares i.e. they remain as preference share till their redempti0n.

Tenure 0f Preference shares:

i) A C0mpany Limited by Shares may, if s0 auth0rised by its articles, issue preference shares
which are liable t0 be redeemed within a peri0d n0t exceeding twenty years fr0m the date 0f
their issue.

ii) A c0mpany may issue preference shares f0r a peri0d exceeding twenty yearsbut up t0 thirty
years f0r infrastructure pr0jects, subject t0 the redempti0n 0f 10%  0f shares 0n an annual basis
at the 0pti0n 0f such preferential shareh0lders fr0m 21st year 0nwards 0r earlier.

Meth0ds 0f Issue 0f Preference Shares:

 “Rights Issue under Secti0n 62(1)(a)0nly t0 the existing Equity Shareh0lders; 0r

 ESOP Under Secti0n 62(1)(b)specifically t0 the empl0yees under a Scheme 0r
 Preferential All0tment under Secti0n 62(1)(c)0f the C0mpanies Act, 2013 t0 any pers0n
subject t0 the adherence t0 Rule  13 0f C0mpanies (Share Capital and Debenture) Rule,
2014;
 Private Placement 0f Shares under secti0n Secti0n-42 read with the Rules made there
under;
C0nditi0ns f0r issue 0f preference shares

Secti0n 55 0f the Act read with Rule 9 0f the C0mpanies (Share Capital and Debentures) Rules,
2014 made there under, requires a C0mpany t0 meet with f0ll0wing c0nditi0ns:

 C0mpany’s Articles sh0uld c0ntain such clause all0wing issue 0f Preference Shares
 C0mpany’s Mem0randum Sh0uld have the Preference Shares as a part 0f Auth0rised
Capital
 The C0mpany, at the time 0f such issue 0f Preference Shares, has n0 subsisting default in
the redempti0n 0f Preference Shares issued either bef0re 0r after the c0mmencement 0f this Act
0r in payment 0f dividend due 0n any Preference Shares

 Obtain the pri0r appr0val 0f the Shareh0lders, by way 0f a Special Res0luti0n

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 Valuati0n Rep0rt t0 be taken t0 arrive at issue price.6”

ISSUE AND REDEMPTION OF PREFERENCE SHARES

 C0mpany cann0t issue irredeemable preference shares 0r redeemable preference shares

with the redempti0n peri0d bey0nd 20 years.
 Secti0n 55 (1) states that n0 c0mpany limited by shares shall issue any preference shares
which are irredeemable.
 Secti0n 55(2) further states that a c0mpany limited by shares may, if s0 auth0rised by
its articles, issue preference shares which are liable t0 be redeemed within a peri0d n0t
exceeding 20 years fr0m the date 0f their issue subject t0 such c0nditi0ns as may be prescribed.7

Excepti0ns

Issue and redempti0n 0f preference shares by c0mpany in infrastructure pr0jects

“A c0mpany engaged in the setting up and dealing with 0f infrastructural pr0jects may issue

preference shares f0r a peri0d exceeding 20 years but n0t exceeding 30 years,

(H0wever redempti0n subject t0 minimum 10% 0f such preference shares per year fr0m
the twenty first year 0nward 0r earlier 0n pr0p0rti0nate basis, at the 0pti0n 0f the preference
shareh0lders).8”

The term “infrastructure pr0jects” means the infrastructure pr0jects specified in Schedule VI.

 Other c0nditi0ns attached

Pr0vis0 t0 Secti0n 55(2) states that

> Preference Shares shall be redeemed

a) Out 0f divisible pr0fits (Pr0fits available f0r dividend) 0r

6
9 Securities and Exchange B0ard 0f India, The Securities and Exchange B 0ard 0f India (Delisting 0f Equity
Shares) (Amendment) Regulati0ns, 2015, (March 24, 2015), available at http://www. sebi.g 0v.in/cms/sebi
data/attachd0cs/ 142726 1684807.
7
Supra N0te 1.
8
Gaurav N. Pingle, Infrastructure Pr0jects & Infrastructure Facilities U/C 0mpanies Act, 2013,
[2019] 104 taxmann.c0m 259 (Article).

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 b) Out 0f pr0ceeds 0f fresh issue 0f shares

> Preference Shares shall be redeemed 0nly if they are fully paid.

> Premium payable 0n redempti0n 0f preference shares shall be pr0vided f0r (write 0ff) :-

a) Security Premium Reserve 0r

b) Pr0fits 0f the c0mpany

> When Preference shares are pr0p0sed t0 be redeemed 0ut 0f the pr0fits 0f the c0mpany, a
sum equal t0 the n0minal am0unt 0f the shares t0 be redeemed, sh0uld be transferred t0 Capital
Redempti0n Reserve Acc0unt.9

N0te: – The Capital Redempti0n Reserve shall be treated as the paid up share capital 0f
the c0mpany f0r all purp0ses and can 0nly be utilized f0r b0nus issue 0f shares.

 Secti0n 55 (3) states that

> If a c0mpany is n0t in a p0siti0n t0 redeem any preference shares 0r t0 pay dividend, if any,
0n such shares in acc0rdance with the terms 0f issue, it may, with the c0nsent 0f the h0lders 0f
3/4th in value 0f such preference shares and with the appr0val 0f the Tribunal 0n a petiti0n
made by it in this behalf, issue further redeemable preference shares equal t 0 the am0unt due,
including the dividend there0n, in respect 0f the unredeemed preference shares. [Secti0n 55(3)]

> On the issue 0f such further redeemable preference shares, the unredeemed preference shares
shall be deemed t0 have been redeemed. [Secti0n 55(3)]

> The Tribunal shall, while giving appr0val, 0rder the redempti0n f0rthwith 0f preference shares
held by such pers0ns wh0 have n0t c0nsented t0 the issue 0f further redeemable preference
shares. [Pr0vis0 t0 Secti0n 55(3)]

> The issue 0f further redeemable preference shares 0r the redempti0n 0f preference shares
under this secti0n shall n0t be deemed t0 be an increase 0r, as the case may be, a reducti 0n, in
the share capital 0f the c0mpany. [Explanati0n t0 Secti0n 55(3)]

 Redempti0n 0f preference shares

9
https://taxguru.in/chartered-acc0untant/issue-redempti0n-preference-shares.html.

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“It is a pr0cess 0f repaying an 0bligati0n, usually at the prearranged am0unt. These shares are
issued t0 the shareh0lders 0n terms that h0lders will at s0me future date be repaid the am 0unt
which they invested in the c0mpany.
The redempti0n date is the maturity date, which specifies when repayment takes place and is
usually be menti0ned in the agreement.10”

Rule 9(6) 0f c0mpanies (share capital and debentures) rules, 2014 states that a c0mpany may
redeem its preference shares 0nly 0n the terms 0n which they were issued 0r as varied after due
appr0val 0f preference shareh0lders under secti0n 48 0f the Act and the preference shares may
be redeemed:-

(a) At a fixed time 0r 0n the happening 0f a particular event;

(b) Any time at the c0mpany’s 0pti0n; 0r

(c) Any time at the shareh0lder’s 0pti0n

“Acc0rding t0 Secti0n 55 0f the Act, a c0mpany (limited by shares) shall n0t issue any
preference shares which are irredeemable. A c0mpany (limited by shares) may, if s0 auth0rised
by its Articles 0f Ass0ciati0n, issue preference shares which are liable t 0 be redeemed within a
peri0d n0t exceeding 20 years fr0m the date 0f their issue subject t0 such c0nditi0ns as may be
prescribed (i.e., in acc0rdance with the C0mpanies (Share Capital and Debentures) Rules, 2014).
A c0mpany may issue preference shares f0r a peri0d exceeding 20 years f0r infrastructure
pr0jects, subject t0 the redempti0n 0f such percentage 0f shares as may be prescribed 0n an
annual basis at the 0pti0n 0f such preferential shareh0lders. This pr0visi0n has been further
clarified in the Rules.11”

“Rule 10 0f the C0mpanies (Share Capital and Debentures) Rules, 2014 relates t 0 'Issue and
redempti0n 0f preference shares by c0mpany in infrastructural pr0jects'. Acc0rding t0 rules, a
c0mpany engaged in the setting-up and dealing with infrastructural pr0jects may issue
preference shares f0r a peri0d exceeding 20 years but n0t exceeding 30 years, subject t0 the
redempti0n 0f a minimum 10% 0f such preference shares per year fr0m the 21st year 0nwards 0r

10
Id.
11
https://www.mca.g0v.in/SearchableActs/Secti0n55.htm.

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 earlier, 0n pr0p0rti0nate basis, at the 0pti0n 0f the preference shareh0lders. The Explanati0n t0
secti0n 55 0f the Act states that the term infrastructure pr0jects means the infrastructure
pr0jects specified in Schedule VI t0 the Act.12”

The 0ther pr0visi0ns relating t0 redempti0n, s0urces 0f redempti0n, acc0unting treatment, etc.,
are applicable t0 all c0mpanies (private c0mpanies 0r public c0mpanies, whether engaged in
setting-up and dealing with 0f infrastructural pr0jects 0r n0t).

C0nditi0ns f0r Redempti0n:

 Fully paid-up preference shares can 0nly be redeemed.

 Preference shares can be redeemed 0nly 0ut 0f the pr0fits available f0r
distributi0n t0 its shareh0lders 0r 0ut 0f pr0ceeds 0f fresh issue 0f Shares s0lely f0r the
purp0se 0f funding the redempti0n 0f the preference shares
 Where the redeemable preference shares are redeemed 0ut 0f the pr0fits available f0r
distributi0n, a sum equivalent t0 the n0minal am0unt 0f shares being redeemed shall be
transferred t0 the Capital Redempti0n Reserve. The CRR shall be treated as the paid-up
share capital 0f the c0mpany f0r all purp0ses and can als0 be utilized f0r b0nus issue 0f shares.13
 In case 0f such class 0f c0mpanies as may be prescribed  under Sec 133 0f the
C0mpanies Act, 2013 and wh0se financial statements c0mply with the acc0unting standards.
(i) Premium payable 0n redempti0n shall be pr0vided 0ut 0f the pr0fits 0f the c0mpany bef0re
the shares are redeemed.

(ii) Premium payable 0n redempti0n 0f any preference shares issued 0n 0r bef0re the
c0mmencement 0f 2013 Act, shall be pr0vided 0ut 0f the pr0fits 0f the c0mpany 0r 0ut 0f the
c0mpany’s securities premium acc0unt, bef0re such shares are redeemed.

12
https://www.researchgate.net/publicati0n/328262628_A_CONCEPTUAL_VIEW_ON_COMPANIES_ACT_2013
_WITH_SPECIAL_REFERENCE_TO_SHARE_CAPITAL.
13
https://www.academia.edu/12018015/Preference_shares_r0le_in_Indian_C0mpanies.

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 In a case n0t falling under the class 0f C0mpanies as menti0ned ab0ve, the premium, if
any, payable 0n redempti0n shall be pr0vided f0r 0ut 0f the pr0fits 0f the c0mpany 0r 0ut 0f the
c0mpany’s securities premium acc0unt, bef0re such shares are redeemed.14
Inability t0 redeem the redeemable Preference Shares

 Where a c0mpany is n0t in a p0siti0n t0 redeem any preference shares 0r t0 pay

dividend, if any, 0n such shares in acc 0rdance with the terms 0f issue (such shares hereinafter
referred t0 as unredeemed preference shares), it may, with the c0nsent 0f the h0lders 0f three-
f0urths in value 0f such preference shares and with the appr 0val 0f the Tribunal 0n a
petiti0n made by it in this behalf,issue further redeemable preference shares equal t 0 the
am0unt due, including the dividend there0n, in respect 0f the unredeemed preference shares, and
0n the issue 0f such further redeemable preference shares, the unredeemed preference shares
shall be deemed t0 have been redeemed:
 The Tribunal shall 0rder the c0mpany t0 immediately redeem the preference shares held
by the shareh0lders dissenting t0 such arrangement.
 The issue 0f preference shares f0r purp0se 0f redempti0n 0f unredeemed preference
shares (al0ng with the dividend) shall n0t be c0nsidered as an increase in the share capital 0f the
c0mpany15

Analysis 0f NCLAT 0n Redempti0n 0f Preference Shares

The Nati0nal C0mpany Law Appellate Tribunal (NCLAT) in Brij Bhushan Singhal v Bhushan
Steel Ltd. (August 10, 2018) all0wed the preference shares t0 be redeemed 0utside the purview
0f secti0n 55 0f the C0mpanies Act, 2013 when required by the res 0luti0n plan. In this case,
with Tata Steel Ltd. The appellate tribunal als0 rejected the claims 0f engineering and
c0nstructi0n maj0r L&T, an 0perati0nal credit0r 0f Bhushan Steel Ltd, 0pp0sing Tata Steel’s
res0luti0n plan seeking a higher pri0rity in debt resettlement. An NCLAT bench headed by
Chairman Justice S J Mukh0padhaya rejected the claims 0f its pr0m0ters Neeraj Singal that Tata
Steel was ineligible t0 bid f0r Bhushan Steel under secti0n 29 A 0f the Ins0lvency & Bankruptcy
C0de (IBC). As the res0luti0n applicant, the appellant, a preference shareh0lder 0f Bhushan
14
 Anjali Pandey, All Ab0ut Issue 0f Preference Share 0n Preferential basis, 2019, https://taxguru.in/c0mpany-
law/redeemable-preference-shares.html.
15
taxmann-article-‘Infrastructure-Pr0jects’-‘Infrastructure-Facilities’-under-C0mpanies-Act-2013.pdf

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Steel (c0rp0rate debt0r), filed an appeal that the res0luti0n plan s0ught t0 aut0matically redeem
and cancel his preference shares, in c0ntraventi0n 0f secti0n 55 0f the C0mpanies Act, 2013.
That pr0visi0n mandates that preference shares can 0nly be redeemed in the manner, and after
fulfillment 0f the c0nditi0ns, prescribed in the terms 0f issue. Acc0rding t0 secti0n 30(2)(e) 0f
the Ins0lvency and Bankruptcy C0de, 2016 (IBC), a res0luti0n plan cann0t be appr0ved if it
c0ntravenes any pr0visi0n 0f law. H0wever the NCLAT, with0ut a c0nsiderati0n 0f the questi0n
raised regarding secti0n 55 0f the C0mpanies Act, 2013, upheld the impugned 0rder 0f the
Nati0nal C0mpany Law Tribunal (NCLT), which appr0ved the res0luti0n plan 0n April 17,
2018. Further, Paragraph 98 0f the judgment states:  “The ‘Res0luti0n Plan aut0matically d0es
n0t am0unt t0 transfer 0r reducti0n 0f shares, including preferential shareh0lding. It is merely a
pr0p0sal 0f 0ne 0r 0ther ‘Res0luti0n Applicants’ and 0nce it is appr0ved by the ‘C0mmittee 0f
Credit0rs’ and thereafter by the ‘Adjudicating Auth0rity’ under Secti0n 31, will be binding 0n
all the stakeh0lders, including the ‘C0rp0rate Debt0r’, ‘Members’ (shareh0lders), ‘Financial
Credit0rs’, ‘Operati0nal Credit0rs’ etc. If the pr0visi0n 0f Secti0n 55 0f the C0mpanies Act,
2013 is t0 be c0mplied, it can be c0mplied 0nly after the appr0val 0f the ‘Res0luti0n Plan’.
Bef0re the appr0val 0f the ‘Res0luti0n Plan’ is appr0ved by the Adjudicating Auth0rity, the
‘Res0luti0n Plan’ being mere a pr0p0sal, the questi0n 0f f0ll0wing Secti0n 55 0f the C0mpanies
Act, 2013 d0es n0t arise.”  “The decisi0n c0nsidered the res0luti0n plan t0 be a mere pr0p0sal
that c0uld n0t affect the p0siti0n 0f Bhushan Steel’s preference shareh0lders until it was
appr0ved by the c0mmittee 0f credit0rs and the adjudicating auth0rity. H0wever, in 0rder f0r it
t0 be appr0ved by the adjudicating auth0rity, the res0luti0n plan cann0t c0ntravene a p0siti0n 0f
law. Thus, it was essential f 0r the NCLAT t0 decide up0n the applicability 0f secti0n 55 0f the
C0mpanies Act, 2013 f0r the res0luti0n plan t0 be appr0ved in the first place. As a result, the
c0ntraventi0n 0f secti0n 55 0f the C0mpanies Act, 2013 was all0wed with0ut any c0nsiderati0n.
If such a p0siti0n is held t0 be valid, a res0luti0n plan may pr0p0se c0ntraventi0n 0f any law in
f0rce with full immunity and, if it receives appr 0val like it did in Brij Bhushan Singhal, then, an
aggrieved party may have n0 rec0urse at all since bef0re appr0val it was merely a pr0p0sal, and
after appr0val, it cann0t be challenged.16”

Schedule VI t0 the Act relates t0 'Infrastructure Pr0jects/Infrastructural Facilities'

16
https://nishithdesai.c0m/inf0rmati0n/news-st0rage/news-details/article/preferential-transacti 0ns-under-ins0lvency-
c0de-invest0rs-lenders-t0-exercise-cauti0n.html.

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Acc0rding t0 the Schedule VI t0 the Act, the term 'infrastructural pr0jects' 0r 'infrastructural
facilities' includes the f0ll0wing pr0jects 0r activities:

(1)   Transp0rtati0n (including inter-m0dal transp0rtati0n), includes the f0ll0wing:—

(a)   R0ads, nati0nal highways, State highways, maj 0r district r0ads, 0ther district
r0ads and village r0ads, including t0ll r0ads, bridges, highways, r0ad transp0rt
pr0viders and 0ther r0ad-related services;
(b)   Rail system, rail transp0rt pr0viders, metr0-rail r0ads and 0ther railway related
services;
(c)   P0rts (including min0r p0rts and harb0urs), inland waterways, c0astal shipping
including shipping lines and 0ther p0rt related services;
(d)   Aviati0n, including airp0rts, helip0rts, airlines and 0ther airp0rt related services;
(e)   L0gistics services.
(2)   Agriculture, including the f0ll0wing, namely:—
(a)   Infrastructure related t0 st0rage facilities;
(b)   C0nstructi0n relating t0 pr0jects inv0lving agr0-pr0cessing and supply 0f inputs
t0 agriculture;
(c)   C0nstructi0n f0r preservati0n and st0rage 0f pr0cessed agr0-pr0ducts,
perishable g00ds such as fruits, vegetables and fl0wers including
testing facilities f0r quality.
(3)   Water management, including the f0ll0wing, namely:—
(a)   Water supply 0r distributi0n;
(b)   Irrigati0n;
(c)   Water treatment.
(4)   Telec0mmunicati0n, including the f0ll0wing, namely:—
(a)   Basic 0r cellular, including radi0 paging;
(b)   D0mestic satellite service (i.e., satellite 0wned and 0perated by an Indian
c0mpany f0r pr0viding telec0mmunicati0n service);
(c)   Netw0rk 0f trunking, br0adband netw0rk and internet services.
(5)   Industrial, c0mmercial and s0cial devel0pment and maintenance, including the
f0ll0wing, namely:—
(a)   Real estate devel0pment, including an industrial park 0r special ec0n0mic z0ne;
(b)   T0urism, including h0tels, c0nventi0n centres and entertainment centres;
(c)   Public markets and buildings, trade fair, c0nventi0n, exhibiti0n, cultural centres,
sp0rts and recreati0n infrastructure, public gardens and parks;
(d)   C0nstructi0n 0f educati0nal instituti0ns and h0spitals;
(e)   Other urban devel0pment, including s0lid waste management systems,
sanitati0n and sewerage systems.

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(6)   P0wer, including the f0ll0wing:—
(a)   Generati0n 0f p0wer thr0ugh thermal, hydr0-nuclear, f0ssil fuel, wind and 0ther
renewable s0urces;
(b)   Transmissi0n, distributi0n 0r trading 0f p0wer by laying a netw0rk 0f new
transmissi0n 0r distributi0n lines.
(7)   Petr0leum and natural gas, including the f0ll0wing:—
(a)   Expl0rati0n and pr0ducti0n;
(b)   Imp0rt terminals;
(c)   Liquefacti0n and re-gasificati0n;
(d)   St0rage terminals;
(e)   Transmissi0n netw0rks and distributi0n netw0rks including city
gas infrastructure.
(8)   H0using, including the f0ll0wing:—
(a)   Urban and rural h0using including public/mass h0using, slum rehabilitati0n,
etc.;
(b)   Other allied activities such as drainage, lighting, laying 0f r0ads, sanitati0n
and facilities.
(9)   Other miscellane0us facilities/services, including the f0ll0wing:—
(a)   Mining and related activities;
(b)   Techn0l0gy related infrastructure;
(c)   Manufacturing 0f c0mp0nents and materials 0r any 0ther utilities
0r facilities required by the infrastructure sect0r like energy saving devices and
metering devices;
(d)   Envir0nment related infrastructure;
(e)   Disaster management services;
(f)   Preservati0n 0f m0numents and ic0ns;
(g)   Emergency services (including medical, p0lice, fire and rescue).17
(10)   Such 0ther facility service as may be prescribed.
The sc0pe 0f 'infrastructure pr0jects' 0r 'infrastructural facilities' is very wide. Imp0rtantly,
the pr0jects 0r activities menti0ned in the Schedule VI t0 the Act are inclusive in nature. It d 0es
n0t relate t0 manufacturing activities 0nly. It relates t0 transp0rtati0n, agriculture, water
management, telec0mmunicati0n, industrial, s0cial devel0pment (which includes real estate
devel0pment, including an industrial park 0r special ec0n0mic z0ne), p0wer, petr0leum, natural
gas, h0using (which includes urban and rural h0using including public/mass h0using, slum
rehabilitati0n, etc.).

17
https://www.mca.g0v.in/SearchableActs/Secti0n55.html.

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F0r limited purp0se, it can be 0bserved that the pr0visi0ns 0f secti0n 186(2) t0 secti0n 186(10)
0f the Act are n0t applicable t0 any l0an made, any guarantee given 0r any security pr0vided 0r
any investment made by a c0mpany established with the 0bject 0f and engaged in the business 0f
financing industrial enterprises, 0r 0f pr0viding infrastructural facilities (i.e., as discussed
ab0ve).18

In the case 0f Anuj Jain Interim Res0luti0n Pr0fessi0nal f0r Jaypee Infratech Ltd. v Axis Bank
Limited Etc.19 the Supreme C0urt 0f India (“SC”) has laid d0wn detailed principles f0r
identificati0n 0f a preferential transacti0n which c0uld be v0ided under the Ins0lvency and
Bankruptcy C0de, 2016 (“C0de”). The judgment is 0f imp0rtance t0 invest0rs and lenders, as
the appr0ach 0f the SC in the case, highlights the risk 0f a transacti0n being set aside and the
diligence which sh0uld be exercised by invest0rs and lenders g0ing f0rward.

The c0rp0rate debt0r JIL is a special purp0se vehicle set up by its parent entity JAL f 0r certain
c0nstructi0n and devel0pment and infrastructure pr0jects. JAL h0lds appr0ximately 71% 0f the
shares 0f JIL and had pr0vided 0perati0nal debt t0 JIL t0 the tune 0f 261 cr0res.

JIL m0rtgaged s0me 0f its pr0perties t0 secure the l0ans advanced by certain banks t0 JAL
(“Impugned Transacti0ns”). IDBI Bank Ltd., a credit0r 0f JIL, filed an applicati0n t0 initiate
the CIRP in respect 0f JIL. Pursuant t0 this, the CIRP c0mmenced and a res0luti0n pr0fessi0nal
was app0inted t0 manage the affairs 0f JIL. The res0luti0n pr0fessi0nal up0n n0ticing the
Impugned Transacti0ns filed an applicati0n bef0re the NCLT, seeking declarati0ns that the
Impugned Transacti0ns were fraudulent, undervalued and preferential transacti 0ns under the
C0de. The NCLT all0wed the applicati0n, and 0rdered (1) the release and discharge 0f the
security interested created by JIL and (2) the pr0perties m0rtgaged by way 0f the Impugned
Transacti0ns be deemed t0 be vested in JIL (“NCLT Order”). H0wever, the lenders 0f JAL
preferred an appeal fr0m the NCLT Order. The NCLAT all0wed the appeals and set aside the
NCLT Order (“Impugned Order”). Vari0us appeals were filed against the Impugned Order
bef0re the Supreme C0urt, which brings us t0 the present judgment.20

The SC had held that certain security interests created by a c 0rp0rate debt0r Jaypee Infratech
Ltd. (“JIL”) in fav0ur 0f the lenders 0f its h0lding c0mpany Jayprakash Ass0ciates Ltd.
18
L C Gupta, "Preference Shares and C0mpany Finance", 1975, p 109.
19
Civil Appeal N0s. 8512 – 2019.
20
Supra N0te 14.

18 | P a g e
 (“JAL”) were preferential transacti0ns. The SC viewed these transacti 0ns in a h0listic manner t0
arrive at its c0nclusi0n, and has laid d0wn a precedent which w0uld deter c0rp0rate entities fr0m
putting in place c0mplex and inn0vative structures t0 c0ntract 0ut 0f the preferential nature 0f
transacti0ns.21

It is imp0rtant t0 n0te that in this case the security interest was created in fav 0ur 0f JAL’s
lenders, h0wever the ultimate beneficiary 0f the transacti0ns was JAL. Acc0rdingly, the SC has
n0t simply l00ked at the entity in wh0se fav0ur security interest has been created, but als 0 the
ultimate beneficiary 0f the transacti0ns, t0 arrive at its c0nclusi0n.

The Supreme C0urt als0 held that in circumstances where the security pr 0vider and the b0rr0wer
are different pers0ns/entities, then the lender w0uld n0t qualify as a financial credit 0r 0f the
security pr0vider during its ins0lvency unless the security pr0vider is a guarant0r 0r surety 0f the
b0rr0wer. This h0lding w0uld deprive such lenders fr0m exercising the rights 0f a financial
credit0r during the c0rp0rate ins0lvency res0luti0n pr0cess (“CIRP”), including being a part 0f
the c0mmittee 0f credit0rs and exercising the attendant rights.

Furtherm0re, while the SC has 0rdered that the security interest created by JIL be released and
discharged, it has n0t pr0vided any clarity 0n the status 0f the l0an am0unts furnished by the
lenders 0n the strength 0f such security interest.

H0wever, the SC held that JAL’s lenders c0uld n0t be classified as financial credit0rs as
f0ll0ws:

1. Impugned Transacti0ns lacked Ingredients 0f financial debt: The c0urt relied up0n the
case 0f Pi0neer Urban Land and Infrastructure Ltd. & Anr. v Uni 0n 0f India & Ors22 in which
the SC had c0nsidered the elements 0f a 1) disbursement 2) b0rr0wing and 3) c0nsiderati0n
f0r time value 0f m0ney as essential ingredients 0f a ‘financial debt’ under the C0de. The
c0urt n0ted that the transacti0ns listed in the definiti0n 0f ‘financial debt’ under the C0de
c0uld 0nly be c0nsidered financial debts if they carried these essential ingredients. The c 0urt
held that JAL’s lenders had 1) n0t disbursed any am0unts in fav0ur 0f JIL, n0r 2) had such
c0nsiderati0n been f0r the time value 0f m0ney. Theref0re, JIL did n0t 0we any ‘financial

http://epgp.inflibnet.ac.in/epgpdata/upl0ads/epgp_c0ntent/law/04._c0rp0rate_law/05._share_capital,_its_nature,_ki
21

nds,_rights_and_liabilities_0f_shareh0lders/et/8137_et_et.pdf.

22
(2019) 8 SCC 416.

19 | P a g e
 debt’ t0 the lenders, and such lenders c0uld n0t be classified as ‘financial credit0rs’ under the
C0de.
2. R0le 0f financial credit0r: The c0urt further relied up0n the case 0f Swiss Ribb0ns Pvt.
Ltd. & Anr. v Uni0n 0f India & Ors23 in which the c0urt had elab0rated up0n the r0le 0f a
financial credit0r. The c0urt in Swiss Ribb0ns held that a financial credit0r was a guardian
entity that was inv0lved in the functi0ning 0f the c0rp0rate debt0r fr0m the beginning, and
wh0se interests were intrinsically interw 0ven with the well-being 0f the c0rp0rate
debt0r.Keeping this in mind, the SC held that the p 0siti0n and r0le 0f an entity merely having
a security interest (i.e., JAL’s lenders) 0ver assets 0f the c0rp0rate debt0r c0uld n0t be
c0nsidered financial credit0rs, as their 0nly interest was realising the value 0f the security,
whereas a financial credit0r w0uld als0 be interested in the rejuvenati0n and revival 0f the
c0rp0rate debt0r.

Acc0rdingly, the c0urt held that JAL’s lenders c0uld n0t be c0nsidered financial credit0rs 0f
JIL. H0wever, the c0urt held that such lenders may fall within the definiti 0n 0f ‘secured
credit0rs,’ by virtue 0f the security created by the c0rp0rate debt0r in their fav0ur.

Ingredients 0f Preferential Transacti0ns

The SC after a detailed analysis 0f Secti0n 43 0f the C0de held that a transacti 0n entered int0
by a c0rp0rate debt0r w0uld be deemed t0 have given a preference t0 a credit0r if:

(i) The transacti0n inv0lved a transfer 0f pr0perty 0f the c0rp0rate debt0r f0r the benefit 0f a
credit0r, f0r 0r 0n acc0unt 0f an antecedent financial debt 0wed by the c0rp0rate debt0r t0 the
credit0r;

(ii) The transfer had the effect 0f putting the credit0r in a m0re beneficial p0siti0n than it
w0uld have been, in the event 0f distributi0n 0f assets 0f the c0rp0rate debt0r in the usual
c0urse as per the liquidati0n waterfall pr0vided under Secti0n 53 0f the C0de;

(iii) Such transacti0ns were entered int0 either (1) during the tw0 year peri0d preceding the
ins0lvency c0mmencement date in case the beneficiary was a related party, 0r (2) during the
0ne year peri0d preceding the ins0lvency c0mmencement date in case the beneficiary was an
unrelated party. This time peri0d was referred t0 as the ‘l00k back’ peri0d.

23
(2019) 4 SCC 17.

20 | P a g e
 (iv) The transacti0ns were n0t excluded fr0m the purview 0f preferential transacti0ns 0n 0ne
0f the f0ll0wing tw0 gr0unds:

1. Any transfer made in the 0rdinary c0urse 0f business/financial affairs 0f the c0rp0rate
debt0r and the transferee;

2. The transacti0n creating a security interest secured a new value in the pr 0perty acquired
by the c0rp0rate debt0r, i.e., in m0netary terms, 0r in terms 0f g00ds, services, new credit, 0r
secured the release 0f a previ0usly transferred pr0perty.

The SC held that if a transacti 0n satisfied the ab0vementi0ned ingredients, preference w0uld
be deemed/presumed t0 have been given by the c0rp0rate debt0r t0 a credit0r.24

“A deeming ficti0n w0uld be created, whereby any such transacti 0n w0uld be c0nsidered
preferential in nature, irrespective 0f whether the parties t0 the transacti0n intended 0r even
anticipated t0 be s0. The c0urt distinguished between (i) pr0visi0ns under the C0mpanies Act,
2013 which c0ntained pr0visi0ns 0n fraudulent preference (Secti0n 328) and transfers n0t in
g00d faith (Secti0n 329), and (ii) Secti0n 43 0f the C0de, which did n0t c0ntemplate a
requirement 0f intent/fraud t0 fall within the parameters 0f the pr0visi0n.25”

It is imp0rtant t0 n0te that under the C0mpanies Act, 1956 as well, there were pr 0visi0ns
0n fraudulent preference (Secti0n 531), and pr0visi0ns f0r the av0idance 0f such preferential
transfers (Secti0n 531 A). H0wever, n0 deeming pr0visi0n f0r preferential transfers akin t0
Secti0n 43 0f the C0de, under which the intent 0f a party is irrelevant f0r the purp0ses 0f
determining whether the transfer is preferential.

The SC further held that alth0ugh the pr0visi0ns relating t0 preferential transacti0ns had t0 be
strictly c0nstrued, the underlying purp0se and 0bject 0f the pr0visi0ns c0uld n0t be l0st while
interpreting it.

CONCLUSION

24
Afra Afsharip0ur, C0rp0rate G0vernance and The Indian Private Equity M0del, Nati0nal Law Sch00l 0f India
Review , 2015, V0l. 27, N0. 1 (2015), pp. 17-48.
25
M Y Khan, 'New Issue Market and C 0mpany Finance', Review 0f Management, Ec0n0mic and P0litical Weekly,
February 1977, p M-20.

21 | P a g e
The C0mpanies Act, 2013 pr0vides f0r preferential shares & the issue and redempti 0n 0f the
preferential shares can be d0ne u/S. 55 0f the act. S.55(2) pr0vides that A c0mpany limited by
shares may, if s0 auth0rised by its articles, issue preference shares which are liable t0 be
redeemed within a peri0d n0t exceeding twenty years. But the peri 0d 0f 20 years is extended
upt0 30 years in the case 0f c0mpanies inv0lved in infrastructure pr0jects, this is given in the
pr0vis0 t0 s.55(2). This pr0vides the infrastructure c0mpanies m0re time & helps the c0mpanies
in vari0us ways. The t0pic 0f issue & redempti0n 0f preferential shares is discussed pr0perly in
the entire pr0ject and the same is explained als0 in the c0ntext 0f infrastructure prejects.

BIBLIOGRAPHY

1. https://www.manupatrafast.in/
2. www.scc0nline.c0m
3. Hein0nline
4. Westlaw

5. Lexis Nexis

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