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redemption of preference shares

meenu (cs) (416 Points)

01 October 2009

Dear All,

Pls. provide the checklist for redemption of preference shares by the company?

Kindly specify if nothing is specified about redeemable/irredeemable pref shares, do we consider the same as redeemable shares?

Best Regards,

meenu

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2 Replies

Manmohan ACA, CS (Chartered Accountant ) (14243 Points)
Replied 01 October 2009

Kindly specify if nothing is specified about redeemable/irredeemable pref shares, do we consider the same as redeemable shares

ofcourse, concept of irredeemable pref shares has been omitted by Companies Act from 1988. Now All shares arepref shares irredeemable.

see following points

1. A company limited by shares can issue redeemable preference shares subject to the provisions of Sec. 80 of the Act. Such an issue must also be authorized by the Articles of the company.

2. With effect from 1st March 1997 a company cannot issue irredeemable preference shares or shares which can be redeemed beyond a period of 20 years (Amendment Act, 1996).

[See 80-5 (A)]

3. A company is permitted to carry out redemption from only two sources. They are:

(a) Profits of the company which would otherwise be available for dividend.

(b) Proceeds of fresh issue of shares made for the purpose of redemption.

The section rules out any other source such as issue of debentures, borrowing from banks and

other financial institutions for carrying out redemption.

4. Where shares are redeemed from out of profits otherwise available for dividend, a sum equal to the nominal value of the shares redeemed must be transferred ‘Capital Redemption Reserve Account’.

5. Only fully paid preference shares are to be redeemed. If partly paid shares are to be redeemed, call must be made first and then redemption must be carried out.

6. Redemption may be at par or at premium according to the terms of issue. If redemption is at premium, such premium must be met out of profits or the balance in ‘security premium account’.

7. Capital Redemption Reserve Account is available only for the purpose of issue of bonus shares. This reserve must be kept intact unless otherwise sanctioned by the court.

8. Redemption of redeemable preference shares does not result in the reduction of authorized capital of the company. To the extent reduction has taken place, company can issue further shares, as if those shares had never been issued.

9. If new shares are issued for the purpose of redemption, it will not amount to increase in

capital.

10. Subject to the provisions of this section, redemption must be carried out in accordance with the terms provided in the Articles of the company.