Lesson - Redemption of
Preference Shares
Preference shares are to be redeemed within 20 years from the date of
issue of these shares. Redemption means repaying the amount of shares.
Redemption date is the maturity date, which is usually printed on the
preference share certificate.
Redemption of Preference Shares is governed by Section 80 of the
Companies Act, 2013.
Redemption of Preference Shares is authorized by its Articles of Association.
Conditions for redemption of preference shares:
A redeemable preference share can not be redeemed unless it is fully called
& paid.
Redemption can be made either out of divisible profits or out of fresh issue
of new
preference or equity share (but not debentures).
Proceeds of fresh issue will include either par value or discounted value of
share, but it will never include any premium.
Divisible or revenue profits that can be used for redemption are:
1. profit & loss account.
2. General Reserve or Revenue Reserve or reserve Fund.
3. Dividend equalization reserve.
4. Sinking Fund.
5. Workman’s Compensation or accident fund.
6. Investment fluctuation fund.
Preference share may be redeemed:
1. Either at par or
2. At premium
Premium on redemption is loss & can be set off
1. First out of securities premium and
2. If not then out of any other revenue reserve.
When redemption id effected out of divisible profits, amount equal to
nominal value of share so redeemed must be transferred out of divisible
profits to Capital Redemption Reserve A/C (CRR).
If redemption is done from accumulated profits, then the replacement of
capital is ensured by transfer to Capital Redemption reserve. Transfer of
divisible profits to Capital Redemption Reserve makes them non –
distributable profits. Capital Redemption Reserve can be used only for issue
of fully paid bonus shares. Thus profits retained in the business get finally
converted into share capital.
The proceeds from issue of debentures cannot be utilized for the purpose
Preference Shares
Preference shares are to be redeemed within 20 years from the date of
issue of these shares. Redemption means repaying the amount of shares.
Redemption date is the maturity date, which is usually printed on the
preference share certificate.
Redemption of Preference Shares is governed by Section 80 of the
Companies Act, 2013.
Redemption of Preference Shares is authorized by its Articles of Association.
Conditions for redemption of preference shares:
A redeemable preference share can not be redeemed unless it is fully called
& paid.
Redemption can be made either out of divisible profits or out of fresh issue
of new
preference or equity share (but not debentures).
Proceeds of fresh issue will include either par value or discounted value of
share, but it will never include any premium.
Divisible or revenue profits that can be used for redemption are:
1. profit & loss account.
2. General Reserve or Revenue Reserve or reserve Fund.
3. Dividend equalization reserve.
4. Sinking Fund.
5. Workman’s Compensation or accident fund.
6. Investment fluctuation fund.
Preference share may be redeemed:
1. Either at par or
2. At premium
Premium on redemption is loss & can be set off
1. First out of securities premium and
2. If not then out of any other revenue reserve.
When redemption id effected out of divisible profits, amount equal to
nominal value of share so redeemed must be transferred out of divisible
profits to Capital Redemption Reserve A/C (CRR).
If redemption is done from accumulated profits, then the replacement of
capital is ensured by transfer to Capital Redemption reserve. Transfer of
divisible profits to Capital Redemption Reserve makes them non –
distributable profits. Capital Redemption Reserve can be used only for issue
of fully paid bonus shares. Thus profits retained in the business get finally
converted into share capital.
The proceeds from issue of debentures cannot be utilized for the purpose
