Page 133 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 15. If a company has to redeem its 7% redeemable preference shares of 40,000 and issue 3,000
equity shares of 10 each at a premium of 10%, how much amount should be transferred
to capital redemption reserve account:
(a) 40,000
(b) 7000
(c) 10,000

(d) 33,000



Case Study OCBC Preference Shares

his preference share is currently trading in SGX under the symbol, OCBC Bk NCPS
5.1% 100. The trading symbol itself can reveal a lot of details. OCBC Bk simply
Tstands for OCBC Bank while NCPS stands fornon-cumulative and non-convertible
preference shares. Non-cumulative means the dividends that were not declared and not
paid in the previous financial year will not be accumulated to the next financial year while
non-convertible means there is no option for the preference shareholders to convert their
preference shares to ordinary shares. The 100 at the end of the trading symbol means that
the lot size is 100 shares i.e. 1 lot is equal to 100 shares as compared to the usual lot size of
1 lot is equal to 1000 shares.
The following are some of the issues that you should consider.

1. Perpetuity: One of the main issue for preference shares is that it will never mature
unless the issuer which in this case, OCBC Bank decides to redeem it back. Notice
that it is stated very clearly that OCBC Bank may, at its option, redeem in whole but
not in part the preference shares on 29 July 2013 or on each dividend date after 29
July 2013. As compared to bonds, the issuer has the obligation to redeem it back. So
what happens if you wish to cash your preference shares out after holding it for
quite a long time ? Either you can wait for OCBC Bank to redeem it back or try to sell
it on SGX but that brings me to my second issue.
2. Liquidity: Due to the small quantity of preference shares that are issued generally,
preference shares usually have poor liquidity and that pose a problem. Firstly, there
may not be buyers who wish to buy your preference shares if you need to sell it and
even if there are buyers, their buying price may not be that favorable i.e. the spread
which is the difference between the buying and selling price can be rather far apart.
That will definitely put you at a disadvantage.
3. Dividends: Do take a closer look on how much dividends they are issuing and
whether it will remain the same. For the OCBC Bk NCPS 5.1% 100, it is clearly stated
that the dividend is 5.1%. However, another preference share that was also issued by
OCBC Bank in August 2008 i.e. OCBC Cap 5.1% NCPS 100 has a different dividend
policy. The dividend policy is such that on or before 20 September 2018, the dividend
is 5.1%. However, after this date, the dividend is pegged to the 3-Month Singapore
Swap Offer Rate plus 2.5% and that to me is a big difference. That would mean that
the amount of dividends will fluctuate subsequently.

126 LOVELY PROFESSIONAL UNIVERSITY