REDEMPTION OF PREFERENCE SHARES
a) Redemption of preference shares means paying back (or repayment to) preference shareholders their money.
Section 80 of the Companies Act permits a company, limited by shares, to issue redeemable
preference shares if it is so authorised by its articles of association.
b) Preference shares may be redeemed either on a specific date which is the maturity date printed on the
preference shares certificate or these shares may be redeemed earlier at the option of the company.
c) However the redemption period cannot exceed 20 years from the date of issue of such shares as provided in
Sub-section 5A of Section 80.
d) The company thus enjoys the flexibility in redemption of the preference shares within the maximum specified
period of 20 years.
e) The Companies Act has abolished the category of irredeemable preference shares with effect from
1-3-1997 as a result of the Companies (Amendment) Act 1996. (80A)
f) Redemption of preference shares involves repayment of capital before paying creditors of the company. It
may affect the interest of creditors.
g) In addition to that the working capital of the company will be depleted as a result of outflow of cash due to
redemption.
h) Amount of the capital redemption reserve account will not be available for distribution of dividend.
i) Preferred stock/ preferred shares or preference shares
j) (w.e.f 1/3/97, no preference chares can be issued which are not redeemed within 20 years)
k) Convert partly paid shares into fully paid shares:
l) Source for redemption should be out of undistributed profit/ distributable profit(otherwise available for
dividend ,) or out of PROCEEDS of fresh issue of shares or both
m) Premium on redemption of pref shares should be should be provided out of securities premium or capital
reserve in cash (i.e profit on revaluation not to be considered) or profit and loss account or general reserve
account.
n) The amount of capital redemption reserve But only for bonus shares issue
o) CRR- If the shares are redeemed out of undistributed profit , the nominal value of share capital, so
redeemed should be transferred to Capital Redemption Reserve Account.
p) The redemption of preference shares under this section by a company shall not be taken as reducing the
amount of its authorized share capital
PROCESS FOR REDEMPTION:
Make PS Make due entry Make New Issue
for Preference entry if required Create CRR
fully paid
and pass Shares and arrange for
entry for cash if required
Sale of
Asset/bank
W/o Premium
Loan
on shares
Issue Bonus Make Payment
Shares of Pref Shares
, NUMERICAL QUESTIONS
1. From the following information, calculate the amount that should be transferred to capital redemption reserve
account in each of the following cases :
Preference Shares to be Redeemed Fresh Issue of Share Capital for
the Purpose of Redemption
(i) Rs. 12,00,000 at par Rs. 10,00,000 at par
(ii) Rs. 12,00,000 at premium of 5% Rs. 10,00,000 at par
(iii) Rs. 12,00,000 at par Rs. 10,00,000 at premium of 10%
(iv) Rs. 12,00,000 at premium of 10% Rs. 10,00,000 at discount of 10%
(v) Rs. 12,00,000 at par Rs. 10,00,000 at discount of 5%
2. From the following information, determine the amount of fresh issue of shares for the purpose of redemption of
preference shares.
Preference Shares to be Available Amount of Reserves
Redeemed and Surplus
(i) Rs. 12,00,000 at par Securities Premium Account 4,00,000
General Reserve Account 8,00,000
(ii) Rs. 12,00,000 at a premium Profit and Loss Account 10,00,000
of 10% Securities Premium Account 80,000
(iii) Rs. 12,00,000 at a premium of Securities Premium Account 40,000
10% Profit and Loss Account 6,00,000
General Reserve 3,00,000
Capital Reserve 60,000
Dividend Equalisation Reserve50,000
3. The balance sheet of Vivek Ltd. as at 31 March is as follows :
Liabilities Rs. Assets Rs.
Share Capital : Fixed Assets :
Issued and Fully Paid : Land and Building 20,00,000
50,000, 9% Preference Shares Plant 5,00,000
of Rs. 20 each fully paid 10,00,000 Fixtures and Fittings 1,00,000
90,000 Equity Shares of Motor Vans 40,000
Rs. 20 each fully paid 18,00,000 Current Assets :
Reserves and Surplus : Stock 6,60,000
Securities Premium Debtors 2,40,000
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a) Redemption of preference shares means paying back (or repayment to) preference shareholders their money.
Section 80 of the Companies Act permits a company, limited by shares, to issue redeemable
preference shares if it is so authorised by its articles of association.
b) Preference shares may be redeemed either on a specific date which is the maturity date printed on the
preference shares certificate or these shares may be redeemed earlier at the option of the company.
c) However the redemption period cannot exceed 20 years from the date of issue of such shares as provided in
Sub-section 5A of Section 80.
d) The company thus enjoys the flexibility in redemption of the preference shares within the maximum specified
period of 20 years.
e) The Companies Act has abolished the category of irredeemable preference shares with effect from
1-3-1997 as a result of the Companies (Amendment) Act 1996. (80A)
f) Redemption of preference shares involves repayment of capital before paying creditors of the company. It
may affect the interest of creditors.
g) In addition to that the working capital of the company will be depleted as a result of outflow of cash due to
redemption.
h) Amount of the capital redemption reserve account will not be available for distribution of dividend.
i) Preferred stock/ preferred shares or preference shares
j) (w.e.f 1/3/97, no preference chares can be issued which are not redeemed within 20 years)
k) Convert partly paid shares into fully paid shares:
l) Source for redemption should be out of undistributed profit/ distributable profit(otherwise available for
dividend ,) or out of PROCEEDS of fresh issue of shares or both
m) Premium on redemption of pref shares should be should be provided out of securities premium or capital
reserve in cash (i.e profit on revaluation not to be considered) or profit and loss account or general reserve
account.
n) The amount of capital redemption reserve But only for bonus shares issue
o) CRR- If the shares are redeemed out of undistributed profit , the nominal value of share capital, so
redeemed should be transferred to Capital Redemption Reserve Account.
p) The redemption of preference shares under this section by a company shall not be taken as reducing the
amount of its authorized share capital
PROCESS FOR REDEMPTION:
Make PS Make due entry Make New Issue
for Preference entry if required Create CRR
fully paid
and pass Shares and arrange for
entry for cash if required
Sale of
Asset/bank
W/o Premium
Loan
on shares
Issue Bonus Make Payment
Shares of Pref Shares
, NUMERICAL QUESTIONS
1. From the following information, calculate the amount that should be transferred to capital redemption reserve
account in each of the following cases :
Preference Shares to be Redeemed Fresh Issue of Share Capital for
the Purpose of Redemption
(i) Rs. 12,00,000 at par Rs. 10,00,000 at par
(ii) Rs. 12,00,000 at premium of 5% Rs. 10,00,000 at par
(iii) Rs. 12,00,000 at par Rs. 10,00,000 at premium of 10%
(iv) Rs. 12,00,000 at premium of 10% Rs. 10,00,000 at discount of 10%
(v) Rs. 12,00,000 at par Rs. 10,00,000 at discount of 5%
2. From the following information, determine the amount of fresh issue of shares for the purpose of redemption of
preference shares.
Preference Shares to be Available Amount of Reserves
Redeemed and Surplus
(i) Rs. 12,00,000 at par Securities Premium Account 4,00,000
General Reserve Account 8,00,000
(ii) Rs. 12,00,000 at a premium Profit and Loss Account 10,00,000
of 10% Securities Premium Account 80,000
(iii) Rs. 12,00,000 at a premium of Securities Premium Account 40,000
10% Profit and Loss Account 6,00,000
General Reserve 3,00,000
Capital Reserve 60,000
Dividend Equalisation Reserve50,000
3. The balance sheet of Vivek Ltd. as at 31 March is as follows :
Liabilities Rs. Assets Rs.
Share Capital : Fixed Assets :
Issued and Fully Paid : Land and Building 20,00,000
50,000, 9% Preference Shares Plant 5,00,000
of Rs. 20 each fully paid 10,00,000 Fixtures and Fittings 1,00,000
90,000 Equity Shares of Motor Vans 40,000
Rs. 20 each fully paid 18,00,000 Current Assets :
Reserves and Surplus : Stock 6,60,000
Securities Premium Debtors 2,40,000
2
