Redemption of prefrence shares

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Ashwini. K (Querist)

20 August 2013 Can debt funds be raised for redemption of Preference Shares? Suppose a public company decides to raise debentures and loan amounting to Rs 10 crores to redeem 20 crores of Preference share capital. Is the companies decision correct?
Which section or Proviso restricts the usage of debt funds for redemption of preference Shares?
Please do clarify.

Ajay Mishra

Ajay Mishra (Expert)

20 August 2013 Hi

Section 80(1) provides conditions for redemption of preference share which has to be complied with by a company (Appendix 4 & 5):—
(1) The preference shares shall be redeemed out of profits of the company which would otherwise be available for distribution as dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption.
(2) Only fully paid preference shares shall be redeemed.
(3) The premium, if any, payable on redemption shall be provided out of profits or out of the company's security premium account, before the shares are redeemed.
(4) Where any preference shares are redeemed out of profits, a sum equivalent to the nominal value of the shares redeemed shall be transferred to the capital redemption reserve fund.

Ashwini. K

Ashwini. K (Querist)

21 August 2013 Thank you sir.
Sir, By reading your reply with section 80(1) of companies act 1956, it can be said that the company can issue shares for the purpose of redemption of preference shares.
But no where in the companies act restrictions on the usage of the debt funds is provided for the purpose of redemption of preference shares.
However section 80(1) provides only two sources of funds for the purpose of redemption of Preference Shares
1. Free Reserves.
2. New issue.
Hence can it be concluded that debt funds cannot be used for the purpose of Redemption of Prefrence Shares.

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