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Redemption of preference shares

18 March 2016

For redemption of preference shares there is a clause that: A sum equivalent to the nominal amount of shares being redeemed shall be transferred to the Capital Redemption Reserve.

My question is: After preference shares get redeemed where the nominal amount of shares come from to be transferred to the Capital Redemption Reserve.

Doesn’t a company return nominal value to shareholders while redemption in order to transfer the same value to the Capital Redemption Reserve?

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6 Replies

Jacky (Accountant & CA Final Student) (320 Points)
Replied 18 March 2016

As far as i know

the amount has to be taken from free reserves & transferred to CRR so as keep the capital intact....

lokeshkumaar (student) (77 Points)
Replied 18 March 2016

You redeem your preference shares by paying cash. Your liability and asset both get reduced. But as a company you want to maintain your capital base. So you have to transfer free reserves available with you to CRR account so that it is not distributed by way of dividend, and your capital level is maintained after the redemption.

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CA Neha Gupta (Managing Partner LNG & Associates) (1839 Points)
Replied 18 March 2016

Agree with Lokesh. The Capital base will return to the same level after redemption when CRR Account is created.

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Sujan Sareen (11 Points)
Replied 20 March 2016

1) Can you elaborate your point that" want to maintain capital base"? I mean how it is maintained.

2) Also elaborate about "Capital level is maintained after the redemption"?

Jouhar Ali (Article) (126 Points)
Replied 20 March 2016

What meant by maintaining capital is that, Secure the amount as capital so that no payment of dividend is made out of said amount. And can be used for business activities