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Accounting for Companies-I

Notes (iv) Capital Redemption Reserve Account can be utilised for declaring fully paid bonus shares
to the shareholders of the company. Otherwise it must be maintained intact unless otherwise
sanctioned by the court.
(v) If any share premium is payable on the redemption of preference, shares, such a premium
must be provided out of the profits of the company, or out of the share premium account
of the company.
(vi) Redemption of preference shares shall not be treated as reduction of authorised share
capital. To the extent a company has redeemed or is about to redeem any preference
shares, it has the power to issue upto the nominal amount of the shares redeemed or to be
redeemed, as if those shares had never been issued.
(vii) If the new shares are issued for the purpose of redemption of preference shares, capital
shall not be deemed to have been increased.

5.1 Purpose of Legal Restrictions

A careful analysis of the conditions of Section 80 of Companies Act regarding the redemption of
preference shares reveals that the basic objective of these conditions is to protect the interest of
creditors of the company. According to Section 80 of the Companies Act, redemption of preference
shares can be either from out of the profits or from out of the proceeds of the fresh issue of
shares. If these conditions are not followed and redemption is carried out any other manner, as
from out of borrowings or by the sale of assets that will affect adversely to the interest of
creditors.
If the redemption of preference shares is carried out of profits available for dividend, amount of
preference share capital redemption will take place Capital Redemption Reserve Account which
will be used only for one purpose namely the issue of fully paid bonus shares. Thus the interest
of creditors will not be affected.
If the redemption of preference shares is carried out of fresh issue of shares, amount of fresh
issue of share capital will take place the amount of preference share redeemed. This will also not
affect the interest of creditors of the company. Thus, on redemption of preference shares, the
amount of redemption of preference shares will be any one of the following:
1. Amount of redemption of preference shares = Amount of capital redemption reserve.
2. Amount of redemption of preference shares = proceeds of fresh issue of shares.

3. Amount of redemption of preference shares = Amount of capital redemption reserve
proceeds of fresh issue of shares.

Self Assessment

True or False:

1. A company can redeem only its preference share during its lifetime.
2. There cannot be redemption of partly paid up preference shares.

Fill in the blanks:
3. Dividend on preference shares is always …………… .
4. The …………… preference shares cannot be issued by a limited company.

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