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 compile 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
- Company must be authorized by its articles of association.
- 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.
- Such shares can be redeemed
- Out of the profit of the company which would otherwise be available for the dividend; or
- Out of the proceeds of a fresh issue of shares made for the purpose of redemption.
- 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’
- 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.
- 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.