What do you mean by Redemption of Preference Shares?

Ans.

REDEMPTION OF PREFERENCE SHARES

According to Section 55, the following conditions have been laid down in regard to redemption of preference shares:

(1) Source of Redemption: No redeemable preference shares shall be redeemed except out of the profits of the company which would otherwise be available for divided or out of the proceeds of a fresh issue of shares made for the purposes of such redemption.

(2) Fully paid shares: No redeemable preference shares shall be redeemed unless they are fully paid.

(3) Provision of Capital Redemption Reserve Account: Where redeemable preference shares are proposed to be redeemed out of the profits of the company, there shall be transferred out of such profits a sum equal to the nominal amount of such shares to be redeemed, to a reserve to be called the Capital Redemption Reserve Account, the application of which reserve is restricted and if it is applied beyond the purposes given in Section 55, then the provisions of this Act relating to reduction of share capital of a company shall apply as if the Capital Redemption Reserve Account were paid-up share capital of the company.

(4) Premium on Redemption of Shares: In regard to payment of premium on redeemable preference shares, the following provisions are given:

(a) Companies complying with prescribed accounting standards: In case of such class of companies as may be prescribed and whose financial statements comply with the accounting standards prescribed for such class of companies under Section 133, if any premium is payable on redemption, then it shall be provided for out of the profits of the company before the shares are redeemed. However, the premium payable on redemption on any preference shares issued on or before the commencement of the Companies Act, 2013, by any such company, 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.

(b) Companies not falling under (a) above, the premium 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.

(5) Conversion into New Preference Shares: According to Section 55(3), where a company is not in a position to redeem any preference shares or to pay dividend on such shares in accordance with the terms of issue (referred to as ‘unredeemed preference shares’), it may issue further redeemable shares equal to the amount due including the dividend thereon, in respect of the unredeemed preference shares, with the consent of the holders of three-fourths (75%) in value of such preference shares and with the approval of the National Company Law Tribunal on a petition made by the company in this behalf. Then, the unredeemed preference shares shall be deemed to have been redeemed. However, while giving the said approval, the Tribunal shall order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

(6) No Change in Capital: It may be noted that Section 55 clearly declares for the removal of doubts that the issue of further redeemable shares or the redemption of preference shares under this section shall not be deemed to be increase or a reduction, as the case may be, in the share capital of the company.

(7) Application of the Capital Redemption Reserve Account: According to Section 55(4), the Capital Redemption Reserve Account may 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.

(8) Conditions of Redemption: A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under Section 48 of the Act and the preference shares may be redeemed:

(a) at a fixed time or on the happening of a particular event;

(b) any time at the company’s option; or

(9) Redemption of Preference Shares by Company in Infrastructural Projects: A company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum ten percent of such preference shares per year from the twenty-first year onwards or earlier, on proportionate basis, at option of the preference shareholders.

Classification of above Rules Relating to Redemption:

(1) Redemption out of Profit i.e. Divisible Profits

Generally the following funds can be used for the payment of dividend:

(i) Statement of Profit & Loss,

(ii) General Reserve,

(iii) Reserve Fund,

(iv) Insurance Fund,

(v) Dividend Equalization Fund,

(vi) Employees’ Compensation Fund, and

(vii) Workers’ Accidents Fund

When the redemption of redeemable preference shares is done by making the capital available from these accounts, then the expected capital is being transferred first in Capital Redemption Reserve A/c.

Non-availability of following funds for the redemption of preference shares. The uses of the balances of the following A/c can bot be done for the payment of redeemable preference shares because these profits are of capitalistic nature:

(i) Securities Premium Reserve A/c,

(ii) Share Forfeited A/c,

(iii) Profits Prior to Incorporation of a company,

(iv) Capital Reserve Account,

(v) Development Rebate Reserve, and

(vi) Investment Allowance Reserve.

(2) By New Issue of Shares: The redemption of redeemable shares can be done by the capital obtained from the new shares for this work. The new shares can be either equity shares or preference shares.

New shares can be issued on equal value or at premium:

(i) If the new shares are issued at par then the share capital can only be used for the redemption of preference shares.

(ii) If the new shares are issued at premium, then the share capital can only be used for the payment of preference shares. The amount of premium can not be used for this purpose.

(3) Paying the Preference Shares by Issuing New Shares and Profit- The payment of redeemable preference shares can be done partially from the profits of the Company, and partially be issuing new shares. Thus, the redemption of redeemable preference hares is done from the profits of the company and by issuing new shares.

If the issuing capital of new shares is given in the question, then the management of the balance capital will be done from the profits of the Company. If the amount of the profits of company is given in the questions, then the balanced capital will be managed from the issue of new shares.