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What is meant by redemption of preference shares? Describe the various methods of redemption of preference shares.

Redemption of Preference Shares

Redemption of preference shares refers to the payment by a company limited by shares to the preference shareholders of the amount appropriated by them in the shares on a predetermined date. In the absence of a fixed date, she can cash back the amount invested in shares at any time during her life time as she so desires. In other words, by a limited company with a share capital, at any time on or after a certain date, to return their share capital in cash or by issue of new shares in their place, cancellation of old shares, redemption of shares or exchange of shares. It’s called release.

Provisions regarding issue and redemption of preference shares (Provision Regarding to Issue and Redemption of Preference Shares)

The main provisions relating to the issue and redemption of preference shares are as follows:

(1) The issue of redeemable preference shares can be done only by the companies having limited liability against the shares.

(2) Redeemable preference shares can be issued only when the limited liability by the shares

The councilors of the company having the right to issue such shares are empowered by the Articles of Association.

(3) Such shares can be redeemed only when they are fully paid i.e. partly paid

(Partly paid) Preference shares due cannot be redeemed.

(4) According to the Companies Act, 2013, companies with limited liability by shares can now issue only such preference shares which are liquidated within 20 years from the date of issue. So now each

Each type of preference shares must be liquidated within 20 years.

(5) Preference shares can be redeemed at par or at premium.

(6) If the preference shares are to be redeemed at a premium, the provision of this premium

The security can be made out of the profit or accumulation of the company before redemption or from the accrual account.

(7) Redemption of such shares either out of the amount received by the issue of new shares or dividends to that effect.

Of the parts available to be made.

(8) If such shares are redeemed out of profits available for dividend, an amount equal to the face values ​​of such shares shall be in the Profit and Loss Account, General Reserve, Dividend Equalization Fund Capital from insurance fund, workers compensation fund, labor accident fund etc. is transferred to the liquidation accumulation account.

(9) If new shares have been issued for the redemption of such shares, the increase in capital on account of the issue of these new shares will not be considered.

(10) Such shares are liquidated by the issue of some new shares and also out of the available profits of dividend for the remaining part.

(11) Use of Capital Redemption Reserve Account Bonus only

Can be for issue of shares only, otherwise this account is shown in the head Reserve and Surplus on the liability side of the company balance sheet.

(12) The following amount cannot be used for redemption of preference shares—

(i) Fraction Account

(ii) Capital Accumulation Account

(iii) Share Premium Account

(iv) With prior amalgamation.

(13) The redemption of preference shares does not amount to reduction in the authorized share capital of the company.

(14) Intimation of redemption of preference shares to the Registrar of Companies within 30 days Necessary.

Methods of Redemption of Preference Shares

The redemption of preference shares can be done as follows

(1) Redemption of profits—In this method, preference shares are redeemed out of the profits available for dividend.

Profit available for dividend means such profit which can be used for payment of dividend. Often the following balances can be used for dividend payments.

(i) Profit & Loss Account,

(ii) General Reserve.

(iii) Reserve Fund.

(iv) Insurance Fund;

(v) Dividend Equalization Fund.

(vi) Employees’ Compensation Fund, (vii) Employees’ Accident Fund.

Therefore, the amount paid on redemption of preference shares from the above funds should be transferred to Capital Redemption Reserve a/c Need.

(2) Redemption by issue of shares – In this method, the preference shares are redeemed by the company by issuing new equity shares or preference shares from the amount received. Issue of new shares at par or interest and the amount received from the issue can be used for redemption as follows

(i) in the case of shares issued at par, the amount of the face value of the shares

(ii) in the case of shares issued at interest only the amount of the face value of the shares, as per the Companies Act, the amount of interest cannot be used for capital payment, but if the shares are

If the redemption is being done at interest, the interest can be used for payment of interest.

(3) Redemption of partly profits and partly by issue of new shares– In this method the redemption of preference shares partly out of profits of the company and partly by new equity shares or The amount received from the issue of preference shares.

(4) Redemption by conversion – In this method, the company, as authorized by its Articles, converts the redeemable preference shares into new equity shares. In this Preference Share Capital Account is debited and Equity Share Capital Account is credited.

Entries on Redemption of Preference Shares (Entries of Redemption of Preference Shares)

(1) If redemption of preference shares due is received by issue of new shares

For the issue of new shares, the following entry is made-

(i) If the issue of new shares is at par (At Par)

Bank a/c

To Share Capital a/c

(ii) if the issue of shares is at premium—

Bank a/c

To Share Capital a/c

To Security Premium Reserve a/c

(2) If the due preference shares are redeemed at a premium, the securities premium should be held to the premium out of accrual account or profits. forward entry is made for

Security Premium Reserve a/c

Profit and Loss a/c/Surplus a/c

To Premium on Redemption of Share a/c

(3) If the preference share due is amortized out of the profits available for dividend, his

make the following entry for

Profit and Loss a/c/Surplus a/c

General Reserve/Other Revenue Reserve a/c To Capital Redemption Reserve alc

(4) The following entries are made for redemption of due preference shares (i) Redeemable Preference Share Capital a/c

Premium on Redemption of Share a/c To Redeemable Preference Shareholders a/c

(ii) Redeemable Preference Shareholder a/c

To Bank a/c

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