Redemption of

Preference Shares

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 Meaning of Preference Shares
Preference shares are those shares which have the two
preferential rights:
(1)A right to receive dividend at a given rate before any
dividend is paid on equity shares; subject to declaration by
the company. Rate of dividend is mentioned on the face of
the share certificate.
For example – 12% Preference Shares.
Here, 12% is rate of dividend.
(1)A right to repayment of capital before equity
shareholders at the time of liquidation of the company.

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 Types of Preference Shares
• Cumulative Preference Shares
– If dividend is not paid on such shares, the arears
dividend are carried forward and are paid
of
in subsequent years.
– All preference shares are cumulative unless
clearly stated to be non-cumulative.
• Non-cumulative Preference Shares
– Dividend is paid out of the each year’s profits.
– If dividend is not paid on such shares, the right
to dividend lapses.
– It is not carried as arrears.

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 Types of Preference Shares (Contd.)

• Participative Preference Shares

– In addition to basic preferential rights, such shares

also carries (a) the right to participate in surplus

profits left after payment of preference and equity
dividend, and (b) in the event of winding up, the right
to participate in the surplus assets left after
repayment of preference and equity capital.

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 Types of Preference Shares (Contd.)

• Non-Participative Preference Shares

– Such preference shares have only basic preferential

rights and no additional rights to participate in surplus

profits and surplus assets.

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 Types of Preference Shares (Contd.)
• Convertible Preference Shares
A convertible preference share the right
of
gets conversion into equity share.

• Non-convertible Preference Shares

–A non-convertible preference share does not have the

right of conversion into equity share.

–All preference shares are non-convertible

unless clearly stated to be convertible.
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 Types of Preference Shares (Contd.)
• Redeemable Preference Shares
On such preference shares, the amount is
refunded in accordance with Sec. 55 of the
Companies Act 2013.

• Irredeemable Preference Shares

Irredeemable preference shares can not be
redeemed during the life of the company.

A company limited by shares cannot issue irredeemable

preference shares in India.
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 Redemption of Preference
Shares – Important
•
Provisions
Redemption of preference shares means
repayment of preference share capital to preference
• shareholders.
The Companies Act 2013 allows the issue of
redeemable preference shares if articles of association
of the company so authorise or permit.
• No company limited by shares shall, after the
commencement of this Act, issue any preference shares
which are irredeemable.
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 Redemption of Preference
Shares – Important
•
Provisions
The preference shares must be redeemed within a period 20
years from the date of issue of such shares. [Sec. 80(5A)]. To
finance infrastructure projects, a company can issue preference
shares for exceeding 20 years but not more than 30 years.
• According to rule 10 of the Companies (Shares and Debentures)
Rules 2014, the tenure of such preference shares cannot exceed
30 years and the company shall redeem every year at least 10%
of such preference shares.

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 Conditions of Redemption [Sec. 55]

1. Such shares must be fully paid.

• Partly paid preference shares must be made fully
paid before redemption by making final call due
and received.
• In case of calls in arrear, such shares can not be
redeemed till they are made fully paid.

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 Conditions of Redemption [Sec. 55]

2. Such shares can be redeemed out of distributable profits

or out of the proceeds of a fresh issue of shares made
for the purpose of redemption.

Distributable or divisible profits:

Profits which can be distributed as dividend.(Capital

Redemption Reserve can be created by transfer from
divisible profits only)

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• Examples Distributable or divisible profits:

– Surplus in the Profit and Loss A/c

– General Reserve or Reserve Fund

– Dividend Equalisation Reserve.

– Insurance Fund or Reserve, Workmen Compensation

Fund, Contingency Reserve, Provision for doubtful
debts, Provision for Taxation (Only in excess of the
required provision or a liability against such Reserve or
Fund can be used to create CRR.)

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• Non-distributable profits:
Profits which can not be distributed as dividend.
(Transfer to CRR is not allowed from these accounts)
• Examples:
–Securities Premium A/c

–Capital Reserve

–Pre-incorporation Profits

–Share Forfeited A/c

–Revaluation Reserve

–Profit on sale of Fixed Assets/Investments

–Debenture Redemption Reserve (DRR)

–Investment Allowance Reserve

–Development Rebate Reserve (Dev. RR) 13

Conditions of Redemption (Contd.)
3. Any premium payable on redemption of such shares shall be
provided from out of the security premium account or out of the
profits.

4. When preference shares are redeemed out of the profits, an

amount equal to the face value of such shares redeemed shall
be transferred from the distributable profits to Capital
Redemption Reserve (CRR) Account.

5. The amount credited to CRR may be used by the company only

by way of issue of fully paid bonus shares.

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 Calculation of Capital Redemption Reserve
(CRR) and Net Proceeds from Fresh Issue

• CRR required
= Nominal Value of Preference Shares to be redeemed – Net
Proceeds from Fresh Issue of Shares
• Net Proceeds from Fresh Issue of Shares
= Nominal Value of Shares issued (Premium on such issue, if any,
is to be ignored)
If new shares issued are partly paid, then only the paid up nominal
amount should be considered.
• Fresh Shares to be issued
= Nominal Value of Preference Shares to be redeemed – Profits
available for CRR.

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 Illustration 1:
Calculate net proceeds from fresh issue:

1. Issued 1,50,000 shares of Rs. 10 each at par

2. Issued 1,50,000 shares of Rs. 10 each at a premium of

Rs. 2 per share

3. Issued 1,50,000 shares of Rs. 10 each at par, only Rs.

8 called and paid.

4. Issued 1,50,000 shares of Rs. 10 each at a premium of

Rs. 2 per share. Only Rs. 9 including premium is
called and paid.
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 Illustration 1:
Calculate net proceeds from fresh issue:

Answer:

(1)15,00,000;

(2)15,00,000;

(3)12,00,000;

(4)10,50,000.

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 Illustration 2
Calculate the amount of CRR required in the following cases:

Preference Shares to Be Fresh issue of share

redeemed capital
1. Rs. 12,00,000 at par Rs. 10,00,000 at par
2. Rs. 15,00,000 at a premium of 5% Rs. 10,00,000 at par
3. Rs. 12,00,000 at par Rs. 9,00,000 at premium of
10%
Answer:
1. Rs. 2,00,000

2. Rs. 5,00,000

3. Rs. 3,00,000

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 Journal Entries

1. If redeemable preference shares are not fully

paid, then to make them fully paid, a final
call should be made and received:
(a) Pref. Share Final Call A/c
Dr. To Pref. Share Capital A/c

(b) Bank A/c Dr.

To Pref. Share Final Call A/c

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 Journal Entries

2. If there is calls-in-arrear on some shares:

• EITHER such amount shall be received,

• OR such shares shall be forfeited and then re-issued

before redemption.
• Entries shall be passed accordingly.

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 Journal Entries (Contd.)
3. For sale of assets/investments to cash
arrange redemption for

Bank A/c
Dr.
To Assets or Investment A/c
* Any loss on sale of assets/investments shall be
debited to Surplus (Profit and Loss A/c).

* Any Profit on sale of assets/investments shall be

credited to Capital Reserve.

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 Journal Entries (Contd.)
4. For issue of debentures, if any

Bank A/c

Dr.
To Debentures Application A/c

Debentures Application A/c

Dr.
To Debentures A/c

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 Journal Entries (Contd.)
5. For issue of new shares, if any
Bank A/c

Dr.
Share
ToApplication & Allotment
Share Application A/c
& Allotment A/c Dr.
To Share Capital A/c
To Securities Premium A/c (if
any)
6. For making due redemption
Dr.
Redeemable Pref. Share Capital A/c Dr.
*Premium on Redemption on of Pref. Shares
A/c
To Preference Shareholders A/c
* If preference shares are redeemed at
premium.
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 Journal Entries (Contd.)
7. For writing off Premium on Redemption, if any

Securities Premium A/c Dr.

Capital Reserve A/c* Dr.
General Reserve A/c Dr.
Surplus A/c Dr.
To Premium on
Redemption of
Pref.
* Above
Sharesorder
A/c or preference is not legally
required. It is desirable that minimum use of
free reserve or divisible profits is made for this
purpose.
Capital reserve (profit) can be used only if it
*
was realised in cash.

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 Journal Entries (Contd.)
8. For arrangement of bank loan or bank overdraft, if required

Bank A/c Dr.

To Bank Loan or Bank Overdraft A/c

9. For payment to Preference Shareholders

Preference Shareholders A/c Dr.

To Bank A/c

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 Redemption of Preference Shares by
Conversion
• Preference shares may be redeemed by
conversion into equity shares. Such preference
shares are Convertible Preference Shares.
• When Preference shares are redeemed by
conversion, there is no need to create Capital
Redemption Reserve.

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Journal Entries for Redemption by Conversion
1. For making due redemption

Pref. Share Capital A/c Dr.

*Prem. On Redemption of Pref. Shares A/c
To Preference Shareholders A/c
* If preference shares are redeemed at
premium.

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Journal Entries for Redemption by Conversion
2. For issue of equity shares at par

Preference Shareholders A/c

Dr.
To Equity Share Capital A/c

3. Preference Shareholders
For issue of A/c at premium
equity shares Dr.
To Equity Share Capital A/c
To Securities Premium A/c

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2
9
3
0
3
1
3
2
3
3
3
4