Redemption of preference shares means returning the preference share capital to the

preference shareholders either at a fixed date or after a certain time period during the
life time of the company provided company must complied certain conditions.

According to Section 100 of the Companies Act 1956, a company is not allowed to return
to its shareholders the share money without the permission of the court. A refund of
money to shareholders on capital account, while the company is in existence, requires
court’s sanction in addition to the special procedure. But Section 80 of the Companies
Act allows a company, if authorized by its articles to issue preference shares which at the
option of the company may be redeemed, if the conditions as laid down under this
Section are to be satisfied.

The following are the important provisions regarding the redemption of

preference shares which are given under Section 80 of the Companies Act:
ADVERTISEMENTS:

(1) Company must be authorized by its articles of association.

(2) No such shares shall be redeemed unless they are fully paid up. The partly paid up
shares cannot be redeemed. If they are partly paid in that case a final call be made to
convert them from partly paid to fully paid only then redemption can be carried out.

(3) Such shares can be redeemed

(a) Out of the profit of the company which would otherwise be available for the
dividend; or

ADVERTISEMENTS:

(b) Out of the proceeds of a fresh issue of shares made for the purpose of redemption.

(4) If the shares are redeemed out of profits available for the distribution for dividend, a
sum equal to the nominal amount of the shares so redeemed must be transferred to
reserve account to be called ‘Capital Redemption Reserve Account’

(5) If preference shares are redeemed at premium, then such premium must be
provided either out of the profits of the company or out of the company’s security
premium account.
(6) The Capital Redemption Reserve Account can be utilized for the issue of fully paid
bonus shares to the shareholders.

Redemption of preference shares by a company is not taken as reducing the amount of

its authorized share capital and as such provisions of the act with regard to reduction of
capital are not required to be complied with. Shares already issued of other type can not
be converted into redeemable preference shares.

No company limited by shares shall, after the commencement of the companies

(amendment Act, 1996), issue irredeemable preference shares or redeemable preference
shares which are Redeemable after 20 years of its issue.

If company fails to comply with these provisions, the company and every officer of the
company who is in default shall be punishable with fine which may extend to Rs.
10,000. Redemption of redeemable preference shares shall be notified to the registrar of
companies within one month of redemption.

Profits available for dividend or the profit out of which the Capital
Redemption Reserve Account is allowed:
The Companies Act permits the redemption of shares from out of the profits, which are
otherwise available for dividend. In case the redemption is out of profits, the company is
expected to transfer an equal amount to an account called ‘Capital Redemption Reserve
Account’ out of divisible profits. The following are the profits which are available for
dividend.
 Central Idea:
Whatever be the source of funds for redemption, the original paid up capital of the
company must not be reduced by a single rupee. Redemption should not affect adversely
the interests of the creditors.

It can happen as follows:

If a company redeems preference shares and soon after, it goes into liquidation, if the
amount available is not sufficient in that case though preference share holders got their
full dues where as the creditors suffered. It is not allowed under law. Creditors must get
priority over the shareholders. Therefore the Companies Act has laid down manifold
conditions for the redemption of preference shares.

Source of Redemption of Preference Shares:

 Preference shares can be redeemed only out of the profits available for distribution to its
shareholders as Dividend
 Preference shares can be redeemed only out of Preference shares can be redeemed
only fresh proceeds of shares issued solely for the purpose of funding the redemption of
the preference shares
Condition for Redemption of Preference Shares:
 Fully paid-up preference shares can only be redeemed.
 A Company may redeem its preference shares only on the terms on which they were
issued or as varied after due approval of preference shareholders under section 48 of
the Act and the preference shares may be redeemed:-
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company’s option; or
(c) any time at the shareholder’s option.
Capital Redemption Reserve:
 Capital Redemption Reserve: Where the redemption of preference shares are
redeemed out of the profits available for distribution, a sum equivalent to the nominal
amount of shares being redeemed shall be transferred to the Capital Redemption
Reserve.
 Utilization of CRR: The CRR shall be treated as the paid up share capital of the
company for all purposes and can also be utilized for bonus issue of shares
Company is not in position to Redeem:
 Where the company is unable to redeem its preference shares or is unable to pay the
dividend due on the preference shares, the company can replace issue such amount of
preference shares as may be necessary in order to meets its obligation towards
dividend payment and also redemption of preference shares.
 Redemption of preference shares by issuing new preference shares is subject to
obtaining the consent of the preference shareholders (at least 75% of the shareholders)
and also obtaining the approval of the Tribunal for such arrangement
 The Tribunal shall order the company to immediately redeem the preference shares
held by the shareholders dissenting to such arrangement. The issue of preference
shares for purpose of redemption of unredeemed preference shares (along with the
dividend) shall not be considered as an increase in the share capital of the company
PROCESS FOR REDEMPTION OF PREFERENCE SHARES:
Call Meeting of Board Director:
 Issue Notice of Board Meeting to all the directors of company at least 7 days before the
date of Board Meeting.
 Att