REDEMPTION OF PREFERENCE SHARS

 As per section 55 of the Act, a company can issue only redeemable preference
shares i.e. a company is not allowed to issue irredeemable preference shares.

 Further, it is mandatory for every company issuing preference shares to redeem it

within a period of 20 years from the date of issue.

 However, a company may issue preference shares with a redemption period of more
than 20 years’ time provided that a certain percentage of such shares are redeemed
annually at the option of the shareholders

 In order to issue securities by way of preference shares by private placement, the

private company (‘the Company’) is required to circulate an offer letter to the selected
group of people to whom the Company proposes to issue its shares.

Redemption of preference shares

 Fully paid-up preference shares can only be redeemed.

 Preference shares can be redeemed only out of the profits available for distribution to
its shareholders or out of fresh proceeds of shares issued solely for the purpose of
funding the redemption of the preference shares

 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. 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

 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 by such amount
of preference shares as may be necessary in order to meet its obligation towards
dividend payment and also the redemption of preference shares.

On the issue of such further redeemable preference shares, the unredeemed preference
Shares shall be deemed to have been redeemed.

 If a company is unable to redeem any preference shares or to pay dividend thereon, it

may redeem such unredeemable preference shares by a further issue of redeemable
preference shares equal to the amount due and dividend due thereon subject to–

a) Consent of the holders of 3/4th in a value of such preference shares;

b) Approval of NCLT
Redemption of preference shares shall be made only from the following:

i) Out of the profits of the company which would otherwise available for dividend.

ii) Out of the proceeds of a fresh issue of shares made for the purpose of such redemption.

Notes:

 Partly paid up shares shall not be redeemed;

 A sum equal to the nominal amount of the shares to be redeemed is to be transferred
to a reserve called “Capital Redemption Reserve;
 Redemption can only take place in case of such class of companies as may be
prescribed and whose financial statements comply with the accounting standards.

i) Premium payable on redemption shall be provided out of the profits of the company before
the shares are redeemed.

ii) Premium payable on redemption of any preference shares issued on or before the
commencement of 2013 Act, shall be provided out of the profits of the company or out of the
company’s securities premium account, before such shares are redeemed.

 When a company is unable to redeem any preference shares, it can issue further
redeemable preference shares equal to the amount due, including the dividend thereon
subject to the following conditions;-

i) With the consent of the preference shareholders holding three-fourths in value; and

ii) With the approval of the Tribunal on a petition made by it in this behalf.

Methods for Redemption of preference shares

Method I: Redemption by Fresh issue of shares:

Ex. 1: Find out the amount to be transferred to Capital Redemption Reserve Account in each
of the following cases:
S. No. Pref. shares to be issued Fresh issue of shares
1. Rs. 1,00,000 at par Rs. 40,000 at par
2. Rs. 1,00,000 at a premium of 10% Rs. 40,000 at par
3. Rs. 1,00,000 at par Rs. 40,000 at premium
4. Rs. 1,00,000 at par Rs. 40,000 at a discount of 10%
5. Rs. 1,00,000 at a premium of 10% Rs. 40,000 at a premium of 10%
Sol.: Fresh issue of shares is necessary in the following manner:
(i) Rs. 60,000;
(ii) Rs. 60,000 (premium on redemption should not be considered);
(iii) Rs. 60,000 (premium on issue of shares should be considered);
(iv) Rs. 64,000 (i.e. 40,000 – 4,000, i.e. Rs. 36,000 to be deducted from Rs. 1,00,000);
(v) Rs. 60,000 (premium on issue of shares and premium on redemption of preference shares
will not affect Capital Redemption Reserve Account.)
Ex. 2: Find out the minimum amount of fresh issue to be needed in order to comply with the
requirement of Sec. 55 of the Companies Act from the following particulars:
Preference Shares to be redeemed Profits shown in the Balance Sheet
(i) Rs.1,00,000 at per (i) Profits Rs.15,000; Securities Premium Rs.5,000
(ii) Rs.1,00,000 at a premium of 10% (ii) Profits Rs.15,000; Securities Premium Rs.5,000
(iii) Rs.1,00,000 at a premium of 10% (iii) Profit Rs.15,000; General Reserve Rs.10,000;
Dividend Equalisation Fund Rs.20,000; Securities Premium Rs.4,000
Sol.: Fresh issue of shares is necessary in the following manner:
(i) Rs.85,000 (i.e. Rs.1,00,000 – Rs.15,000; Securities Premium Account cannot be utilised
for the purpose as the same is not at all available for dividend and, hence, Capital
Redemption Reserve cannot be created out of the same).
(ii) Rs.90,000 (i.e. Premium on Redemption is Rs.10,000 (1,00,000 x which is adjusted
against Securities Premium of Rs.5,000 and Profit and Loss Account of Rs.5,000. Thus,
balance left in P & L A/c (Rs.15,000 – Rs. 5,000) Rs.10,000 which is available for dividend,
i.e., for transferring to Capital Redemption Reserve Account. So fresh issue to be made for
Rs.90,000 (i.e. Rs.1,00,000 – Rs.10,000).
(iii) Rs.61,000 (i.e. Premium on redemption is Rs.10,000 which is to be adjusted against
Securities Premium Account (in full) Rs.4,000 and balance Rs.6,000 to be taken from P & L
Account. Thus Profits available for dividends: From P & L A/c Rs.9,000 (i.e., Rs.15,000 –
6,000), General Reserve Rs.10,000, Dividend Equalisation Fund Rs.20,000, i.e. Total
Rs.39,000 may be taken for transferring Capital Redemption Reserve and balance Rs.61,000
(1,00,000 – 39,000) to be taken from fresh issue.
Ex. 3: From the following particulars, determine the number of fresh issue of Equity Shares:
Preference Shares to be redeemed: Rs.1,00,000 at a premium of 10%
Profits to be shown in the Balance Sheet: Profits Rs.15,000; Securities Premium Rs. 2,000
and new issue is to be made at a premium of 5%
Sol.: Calculation of shares to be issued and amount thereon:
Let the fresh issue of shares be x
Therefore, Prem. on fresh issue at 5% = 5x/100
Therefore, 1,00,000 + 10,000 = 15,000 + 2,000 + x(fresh issue) + (5x* Premium)/100
1,10,000 = 17,000 + x + 5x/100
93,000 = x + 5x/100
x = 88,571
(If value of share is Re. 1; and it will change accordingly in case of Rs. 50 and Rs. 10)
Ex. 4: From the following particulars, calculate:
(i) The minimum issue; and (ii) The amount of issue.
Nominal value of preference shares to be redeemed Rs.20,000
Premium on redemption @ 10%
 Profits available for dividends Rs.4,000
Fresh issue to be made at a premium of 10%
Sol.:
(i) Calculation showing the minimum issue:
Minimum issue Rs.16,000 (i.e. 20,000 – 4,000)
(ii) The amount of issue:
Rs.20,000 + Rs.2,000 = Rs.4,000 + x + 10x/100
Or, Rs.18,000 = x + 10x/100
Or, x = Rs.16,364

Accounting Entries
S. No. Case/Journal Entry Amt. to be entered
1. For the amount payable on redemption:
i. If Redeemed at par:
Redeemable Pref. Share Capital A/C Dr. Nominal value of Pref. shares
To Pref. Shareholders A/C redeemed
ii. If Redeemed at premium:
Redeemable Pref. Share Capital A/C Dr. Nominal value of Pref. shares redeemed
Prem. on Redemp. of Pref. Shares A/C Dr. Prem. payable on redemption
To Pref. Shareholders A/C Total Amount
2. For the amount payable on redemption:
i. When shares are redeemed out of proceeds
of fresh issue of Equity/Pref. shares at
par:
Bank A/C Dr. Total Amount
To Equity Share Capital A/C Nominal Value
To Pref. Share Capital A/C Nominal Value
To Sec. Prem. A/C (if any) Prem. received on fresh issue
ii. When issued at a Premium:
Bank A/C Dr. Total amount
To Share Capital A/C Nominal value
To Securities Prem. A/C Amount of premium
3. For Adjusting premium on redemption
of Pref. shares (if any):
Securities Prem. A/C Dr. With the amount of prem. payable
Or, P&L A/C Dr. on redemption
To Prem. on Redemp. of Pref. Shares
A/C
4. For payment to Pref. Shareholders:
Pref. Shareholders A/C Dr. Amount paid to Pref. Shareholders
To Bank A/C
5. Arrangements for Cash Balances: If liquid
assets are not available current assets may
be current assets are sold for the
arrangement of cash:
Bank A/C Dr. With the amount of cash realised
To Respective Asset A/C
 (Profit /Loss on sale of such asset should be
transferred to P&L A/C)
6. Conversion of Shares: If redemption is
done by conversion into some other type of
shares
Pref. Share Capital A/C Dr.
To (New) Share Capital A/C

Method II: Capitalisation of Undistributed Profits/Reserves:

Ex. 5: Following is the information regarding Z Ltd.
Balance Sheet of Z Ltd.
as on 31st March, 2008
Liabilities Amt. Assets Amt.
Eq. Share of Rs. 10 each 3,00,000 Plant & Machinery 3,00,000
1,00,000 8% Pref. Shares of Rs.10 each 1,00,000 Land & Building 1,00,000
Profit & Loss A/C 2,00,000 Stock 1,00,000
Creditors 1,00,000 Debtors 50,000
Cash 1,50,000
7,00,000 7,00,000
The Preference shares are redeemed on 1st April 2008 at par.
Show the effect of creating a Capital Redemption Reserve out of Profit and Loss Account
(available for paying dividend) which shows that the interest of creditors is not at all affected.
Sol.: Statement showing the amount available to Creditors
(before redemption and after redemption)
Particulars 31st 1st April, 2008 1st April, 2008
March, (when transfer (when transfer
2008 is not made) is made)
Total Assets 7,00,000 6,00,000* 6,00,000*
Less: P & L A/C (available for paying dividend) 2,00,000 2,00,000 1,00,000
5,00,000 4,00,000 5,00,000
* Amount after redemption of Pref. Shares

Accounting Entries
S. Case/Journal Entry Amt. to be entered
No.
(A) For the amount payable on redemption:
(i) If Redeemed at par:
Redeemable Pref. Share Capital A/C Dr. Nominal value of Pref. shares
To Pref. Shareholders A/C redeemed
(ii) If Redeemed at premium:
Redeemable Pref. Share Capital A/C Dr. Nominal value of Pref. shares redeemed
Prem. on Redemp. of Pref. Shares A/C Dr. Prem. payable on redemption
To Pref. Shareholders A/C Total Amount
(B) For transferring money to CRR A/C:
 General Reserve A/C Dr.
Profit & Loss A/C Dr.
Dividend Equalisation Fund A/C Dr. Nominal value of Pref. shares redeemed
Workmen Compensation Fund A/C Dr.
Workmen Accident Fund A/C Dr.
To CRR A/C
(C)
(i) If CRR A/C is applied for issuing fully paid Amount paid to Pref. Shareholders
bonus shares:
CRR A/C Dr.
To Bonus to Shareholders A/C
(ii) For transferring bonus shares to Eq.
shareholders:
Bonus to Shareholders A/C Dr.
To Eq. Share Capital A/C
(D) For adjusting premium on redemption:
Securities Premium A/C Dr. With the amount of premium paid
P & L A/C Dr. on redemption
To Prem. on Redemp. of Pref. Shares A/C
(E) For payment to Pref. Shareholders:
Pref. Shareholders A/C Dr. Amount paid to Pref. Shareholders
To Bank A/C

Method III: Redemption of Preference Shares by Application of Both Methods (i.e.

partly from fresh issue of shares and partly from profit): Under the circumstances, a company
can redeem its preference shares (i) using fresh issue of shares and (ii) out of profits by
creating Capital Redemption Reserve.
 Practical Problems
Q 1: X Ltd. has part of its share capital in 1,000, 8% Redeemable Preference Shares of Rs.
100 each. The shares have now become ready for redemption. The preference shares
are to be redeemed at a premium of 10% out of fresh issue of equity shares @ Rs. 10
each. The balance sheet of the company showed a balance in Securities Premium
Account to the extent of Rs. 15,000. Show the entries.

Q 2: What entries can be made for if, in 2003, X Ltd. redeemed Rs. 1,00,000 preference
shares by converting them into equity shares issued at 25% premium.

Q 3: X Co. Ltd. issued 50,000 Equity Shares of Rs.10 each and 3,000 Redeemable Preference
Shares of Rs.100 each, all shares being fully called and paid-up on 31.3.08. Profit and
Loss Account showed undistributed profits of Rs.1,50,000 and General Reserve stood
Rs.2,20,000. On 1.4.2008, the Directors decided to redeem the existing preference
shares at Rs.105 utilizing as much profits as would be required for the purpose. Show
the entries.
Q 4: A company has 4,000, 6% Redeemable Preference Shares of Rs. 100 each fully paid.
The company decides to redeem the shares on Dec. 31, 2008 at a premium of 5%. The
company makes the following issues:
(a) 1,000 Equity Shares of Rs. 100 each at a premium of 10%.
(b) 1,000, 6% Debentures of Rs. 100 each.
The issue was fully subscribed and allotments were made. The redemption was duly
carried out. The company has a credit balance in Profit and Loss A/c Rs. 5,00,000 and
Securities Premium A/c Rs. 50,000. Show the entries.

Q 5: Sourav Ltd. presented the following Balance Sheet as on 31st March 2008:
Balance Sheet
as at Mar. 31st, 2008
Liabilities Amt. Assets Amt.
Share Capital: Plant & Machinery 5,00,000
Authorised ……….. Investment 1,00,000
Issued & Paid-up: Stock 2,50,000
50,000 Eq. Sh. of Rs. 10 each fully paid 5,00,000 Debtors 1,50,000
2,000 10% Pref. Sh. of Rs. 100 each fully paid 2,00,000 Cash and Bank 2,10,000
2,000 8% Pref. Sh. of Rs.100 each, 80 Called-up 1,60,000
Securities Premium A/C 50,000
General Reserve A/C 1,00,000
Profit & Loss A/C 1,00,000
Creditors 1,00,000
12,10,000 12,10,000
On 1st April 2008, the company redeemed its 10% Pref. shares at a premium of 10%. For this
purpose, the company:
(1) Sells investment for Rs. 80,000.
(2) A part of Plant and Machinery WDV Rs. 1,50,000 was sold for Rs. 1,20,000.
(3) Took a loan from ICICI Bank at an interest rate of 12% amounting to Rs. 1,00,000.
(4) Minimum reduction to be made from General Reserve Account.
(5) Issued 6,000 equity shares @ Rs. 10 each, fully paid at par.
Show the entries immediately after redemption.

Q 6: The balance sheet of XYZ Ltd., as at 31st December 1998 includes the following:
50,000 8% Pref. shares of Rs. 100 each, Rs. 70 paid-up Rs. 35,00,000
1,00,000 Eq. shares of Rs. 100 each fully paid-up Rs. 1,00,00,000
Securities Premium Rs. 5,00,000
Capital Redemption Reserve Rs. 20,00,000
General Reserve Rs. 50,00,000
Under the terms of the issue, the preference shares are redeemable on March 31, 1999 at a
premium of 5%. In order to finance the redemption, the company makes a right issue of
50,000 equity shares of Rs. 100 each at Rs. 110 per share, Rs. 20 being payable on
application, Rs. 35 (including premium) on allotment and the balance on January 1, 2000.
The issue was fully subscribed and allotment made on March 1, 1999. The money due on
allotment were received by March 31, 1999.
The company decides to redeem pref. shares by minimum utilisation of General Reserve.
You are asked to pass the necessary journal entries
Q 7: The Balance Sheet of M Ltd. stood as under on 31.12.2008:
Balance Sheet
as on 31st Dec.2008
Liabilities Amt. Assets Amt.
9% Redeemable Pref. Shares of Rs.100 Sundry Debtors 9,50,000
each, fully paid-up 6,50,000 Investments 2,75,000
Eq. Shares of Rs.5 each, fully paid-up 2,25,000 Cash at Bank 67,500
General Reserve 1,00,000
Profit & Loss A/C 2,60,000
Sundry Creditors 57,500
12,92,500 12,92,500
The preference shares are to be redeemed on 1.1.2009, at a premium of 7 ½%. In order to
facilitate redemption the company had decided:
(i) To sell the investments for Rs. 2, 60,000.
(ii) To finance part of the redemption from company’s fund; and
(iii) To issue sufficient equity shares at a premium of Re. 1 per share to raise the balance of
funds required,
(iv) Minimum Bank Balance to be retained at Rs. 10,500. The Investments were sold, the
equity shares were fully subscribed and the shares were duly redeemed.
Show the entries considering that minimum reduction is to be made against General Reserve.

Q 8: SK Ltd. has issued Share Capital of 60,000, 8% Redeemable Cumulative Pref. Share of
Rs. 20 each and 4,00,000 Equity Shares of Rs. 10 each. The Pref. Shares are redeemable
at a premium of 5% on 1st January 2006. On that date the Balance Sheet was:
Liabilities Amt. Assets Amt.
Issued Share Capital: Plant & Machinery 25,00,000
60,000 8% Redeemable Pref. Shares of Furniture & Fixtures 9,00,000
Rs.20 each, fully paid-up 12,00,000 Stock 15,00,000
4,00,000 Eq. Shares of Rs.10 each, fully paid 40,00,000 Debtors 14,00,000
Profit & Loss A/C 7,00,000 Investments 3,50,000
 Sundry Creditors 11,00,000 Balance of Bank 3,50,000
70,00,000 70,00,000
In order to facilitate the redemption of Preference Shares it was decided:
(a) To sell the Investment for Rs. 3,00,000.
(b) To finance part of the redemption from company funds subject to leaving of balance of
Profit and Loss Account of Rs. 2,00,000.
(c) To issue sufficient Equity Shares of Rs. 10 each at a premium of Rs. 2 per share to raise
the balance of funds required.
The Preference Shares were redeemed on due date and Equity Shares were fully subscribed.
You are required to prepare Journal entries to record the above transactions.