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Redemption of Preference Shares as per Companies Act 2013 and its latest Amendments

CMA SIVAKUMAR A,ACMA. 
on 16 November 2020

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Through this article, I intend to summarize relevant provisions relating to the Redemption of Preference Shares as per Companies Act 2013 and its latest Amendments.

I. Sec 55 (1)

No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable

(2) A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed:

Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders:

Provided further that

  1. No such shares shall be redeemed except out of profits of the company which would otherwise be an available dividend or out of the proceeds of fresh issue of shares made for the purposes of such redemption
  2. No such shares shall be redeemed unless they are fully paid
  3. Where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account.
  4. (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company before the shares are redeemed;
Redemption of Preference Shares as per Companies Act 2013 and its latest Amendments

Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of profits of the company or out of the company’s securities premium account before such shares are redeemed.

(ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account before such shares are redeemed.

(3) The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

II. Sources of Redemption

There are three sources of redemption of preference shares. They are

  1. Redemption out of the fresh issue of shares
  2. Redemption out of Profits
  3. Redemption partly out of the fresh issue and partly out of profit

III. Redemption out of the fresh issue of shares.

Following are the important points related to this concept

1. The company may issue fresh shares either at par or at a premium. Share premium out of a new issue cannot be used for redemption. Only the face or nominal value of shares so issued can be utilized for redemption. Redeemable preference shares cannot be redeemed by issuing debentures.

Accounting Procedure

A. If redeemable preference shares are partly paid up, make it fully paid up

i. Preference Share Call A/C ..Dr
To Preference Share Capital A/C

ii. Bank A/C ..Dr
To Preference Share Call A/C

B. Fresh issue of shares

i. At Par

Bank A/C ..Dr
To Share Capital A/C

ii. At Premium

Bank A/C ..Dr
To Share Capital A/C
To Securities Premium Reserve A/C
As per Sec 53, Companies cannot issue shares at discount.

C. Redemption of Preference Shares

(i) Redemption at Par

Redeemable Preference Share Capital A/C ..Dr
To Preference Shareholders A/C
Preference Shareholders A/C ..Dr
To Bank A/C

 

(ii) Redemption at Premium

Securities Premium Reserve/Statement of Profit
and Loss A/C…….Dr
To Premium on Redemption of
Preference Shares A/C
(Premium on redemption provided out of Securities premium or profit and loss. First, take Securities Premium. Then take from Profit or Reserve)
Redeemable Preference Share Capital A/C Dr
The premium on Redemption of Preference Shares A/C..Dr
To Preference Shareholders A/C
Preference Shareholders A/C ..Dr
To Bank A/C

(iii) Redemption out of Profits.

No such shares shall be redeemed except out of profits of the company which would otherwise be an available dividend or out of the proceeds of fresh issue of shares made for the purposes of such redemption

Where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account.

Profits Available for Dividend

Profits not Available for Dividend

1. Profit and loss A/C
2. General Reserve
3. Reserve Fund
4. Dividend equalization Fund
5. Insurance Fund
6. Workmen Compensation Fund
7. Voluntary Debenture Redemption account
8. Voluntary Debenture Sinking Fund

 1. Security Premium A/C
2. Forfeited Shares A/C
3. Profit Prior to incorporation
4. Capital Reserve
5. Development Rebate Reserve

 

Journal Entries

On transfer to Capital Redemption Reserve A/C
Statement of Profit and Loss/General Reserve A/C….Dr
To Capital Redemption Reserve A/C

Redemption at Par

Redeemable Preference Share Capital A/C ..Dr
To Preference Shareholders A/C
Preference Shareholders A/C ..Dr
To Bank A/C

Redemption at Premium

Securities Premium Reserve/Statement of Profit
and Loss A/C…….Dr
To Premium on Redemption of
Preference Shares A/C
(Premium on redemption provided out of Securities premium or profit and loss. First, take Securities Premium. Then take from Profit or Reserve)
Redeemable Preference Share Capital A/C Dr
Premium on Redemption of Preference Shares A/C..Dr
To Preference Shareholders A/C
Preference Shareholders A/C ..Dr
To Bank A/C

III. Redemption out of the fresh issue of shares and Profits.

(Redeemable Preference share Capital+Premium on Redemption )= [(Security premium Reserve in the B/S)+Divisible Profits in the B/S+(X)+(X*Rate of Premium)].
X=Fresh issue.

The above equation can be used to find out the amount of fresh issue when it is not given.


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