Redemption Of Preference Essay

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Redemption of Preference Shares

The fund provided by the owners in to a business is known as capital. You know that capital of the business depends upon the form of business organization. From ownership point of view, there are number of business organizations like, sole proprietorship business, partnership business, cooperative societies, joint stock companies etc. Total capital of the company is divided into a number of small units of fixed amount and each such unit is called a share. The fixed value of a share register with the registrar of Companies is called face/ nominal value. However, a company can issue shares at a price different from its nominal value or face value. As the total capital of the company is divided into shares,
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In this case, the dividend will be lapsed and there will be no arrear dividend.

|1.3 Conditions for redemption of preference shares |

Before going to redeem the preference shares as per section 80 of the Companies Act, 1956, a company should have to follow the conditions: i) There must be a provision in the Articles of Association regarding the redemption of preference shares. ii) The redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted in to fully paid shares before redemption. iii) The redeemable preference shareholders should be paid out of undistributed profit/ distributable profit or out of fresh issue of shares for the purpose of redemption. iv) If the shares are redeemed at a premium, it should be should be provided out of securities premium or profit and loss account or general reserve account. v) The proceeds from fresh issue of debentures cannot be utilized for redemption. vi) The amount of capital reserve cannot be used for redemption of preference shares. vii) If the shares are redeemed out of undistributed profit , the nominal value of share capital, so redeemed should be transferred to Capital Redemption Reserve Account. This is also known as capitalization profit.

So, you may understand that a company must follow the above conditions for the purpose of redemption of its redeemable
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