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Sukhpreet Kaur, Lovely Professional University Unit 5: Redemption of Preference Shares

Unit 5: Redemption of Preference Shares Notes

CONTENTS
Objectives
Introduction

5.1 Purpose of Legal Restrictions
5.2 Sources of Redemption
5.2.1 Explanation of Proceeds of Fresh Issue
5.2.2 Capital Redemption Reserve Account
5.3 Summary

5.4 Keywords
5.5 Review Questions
5.6 Further Readings

Objectives

After studying this unit, you will be able to:

 Describe the Redemption of shares
 Explain Fresh issue
 Understand Redemption of capital account

Introduction
Generally, a company limited by shares is not permitted to return the share money to its
shareholders except in the case of its winding up. If a company wants to return the share money
to the shareholders, it must be empowered by the Articles of Association and it must secure the
permission of the court as per Section 100 of Companies Act. But the court’s permission is not
necessary if the share money is being returned to the preference shareholders. Under Section 80
of Companies Act, a company limited by shares may, if so empowered by its Articles of
Association, issue redeemable preference shares which will be redeemable at the discretion of
the company, or after the expiry of a stipulated time. Along with it, section 80(5A) states that
“Notwithstanding contained in this Act, no company limited by shares shall, after the
commencement of the Companies (Amendment) Act 1988, issue any preference share which is
irredeemable or is redeemable after the expiry of a period of ten years from the date of its issue.”
If a company is issuing redeemable preference shares, redemption will be according to the
terms of issue but the following legal restrictions as per Section 80 relating to redemption of
preference shares must be fulfilled:
(i) No share can be redeemed unless they are fully paid.

(ii) Such share can be redeemed either (a) cut off the profits which would otherwise be available
for dividend or (b) out of the proceeds of the fresh issue of shares made for the purpose of
redemption. Both of the sources can be used simultaneously.
(iii) Where redemption is made out of profits otherwise available for dividend, a sum equal to
nominal amount of the shares so redeemed must be transferred to a reserve fund account
to be called ‘Capital Redemption Reserve Account.’

LOVELY PROFESSIONAL UNIVERSITY 103