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.

ADVERTISEMENTS:

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:
ADVERTISEMENTS:

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.

ADVERTISEMENTS:

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.