Redemption of Preference Shares

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CS Akansha Gambhir (Querist)
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28 July 2010 What are the formalities and procedures to be followed to redeem the preference shares of a company? Do they differ in respect of private and public companies? If yes, to what extent?

srinath

srinath (Expert)
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28 July 2010 wehn pref shares are redeemed then the amount equal to the value of pref shares should be transferred to capital redemption reserve either from free reserves or securities premium

CS Akansha Gambhir

CS Akansha Gambhir (Querist)
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28 July 2010 The company has redeemed shares last year but not from the sources specified in the Act but from loan funds & no disclosure has been made in the audit report, neither the company has received any notice from any authority till date. Can the matter be regularised?

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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20 July 2025 Yes, the matter can and should be regularised — though post-facto rectification will not technically make the previous redemption valid under law, voluntary compliance and disclosure may mitigate legal consequences if action is initiated later. Here's how you can approach this situation:

🔍 Issue Recap

Preference shares were redeemed last year.
Funds used for redemption: Loan funds (which is not permitted under Section 55 of the Companies Act, 2013).
No transfer was made to Capital Redemption Reserve (CRR).
No disclosure was made in the audit report.
No action or inquiry from regulatory authorities so far.
⚖ Legal Non-Compliance

Under Section 55(2) of the Companies Act, 2013:

Redeemable preference shares can only be redeemed out of:
Profits available for distribution (free reserves), or
Proceeds of a fresh issue of shares made for redemption.
Redemption out of borrowed funds (loan) is illegal under the Act.
✅ Regularisation Steps (Voluntary Correction)

Although the Act does not provide a specific mechanism for retroactive compliance, the company can take the following steps to mitigate consequences:

1. Pass a Board Resolution (Current Date)
Acknowledge that redemption was made out of incorrect source.
Approve a transfer of equivalent amount to Capital Redemption Reserve (CRR) from available free reserves now.
If not available, infuse fresh equity or wait until profits are available.
2. Correct the Financial Statements
Make a note in the next year’s financials as a prior period adjustment.
Adjust entries in books showing creation of CRR as if created at the time of redemption.
3. Voluntary Disclosure in Next Audit Report
Include a disclosure in the notes to accounts or auditor’s report for transparency.
Mention that corrective action has now been taken.
4. No Need to File with ROC (unless you are refiling financials)
If financials are not being restated, no fresh MGT-7 or AOC-4 filing is required unless ordered.
⚠ Risk Factors

If discovered by regulators or during scrutiny, this could lead to:
Penalty for non-compliance with Section 55
Directors/officers held liable under Section 447 (fraud), if misrepresentation is suspected
Disqualification under Section 164(2) in severe cases

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