As per the Companies Act, 1956, as amended in 1988, only preference shares which are redeemable within 10 years can be issued. The preference shares may be redeemed at par or at premium.
Redemption of Preference Shares means the repayment to the shareholders of preference share capital. 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 and the preference shares may be redeemed.
Upon redemption, the redeemable preference shares are cancelled. You should remember that a company’s redemption of the shares eliminates any dividend rights attached to them.
Redemption of preference shares means repayment by the company of the obligation on account of shares issued. … For this, it requires that either fresh issue of shares is made or distributable profits are retained and transferred to ‘Capital Redemption Reserve Account’.
In case of redemption of preference shares through allotment of fresh issue of shares and wherein the fresh issue has been made at a premium, the amount of face value of shares shall be credited to the share capital account and the amount of premium shall be credited to the security premium account.
The sources for redemption come from two sources – Fresh issue of shares and Profit of the Company. When redemption is out of fresh issue, the amount received on fresh issue is utilised for the redemption of preference shares. Thus new shares take the place of redeemed shares.
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.
Issuing redeemable preferential shares provides the company with an option to choose between whether to repurchase shares or redeem shares depending on the market condition. The company redeems shares when it decides to pay back the shareholders. It is a way of paying the shareholders similar to paying dividends.
(i) No redeemable preference shares can be redeemed unless they are fully paid. In other words, only fully paid preference shares can be redeemed. (ii) They can be redeemed either at par or at a premium, but not at a discount.