Redemption of Preference Shares by a Company Limited by Shares

By | September 26, 2017
Redemption of Preference Shares

Redemption of Preference shares by a Company Limited by Shares

Key Considerations:

  1. 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 under section 48 of the Act. The preference shares may be redeemed:
    1. At a fixed time or on the happening of a particular event;
    2. Anytime at the company’s option; or
    3. Anytime at the shareholder’s option. [Rule 9(6) of the Companies (Share Capital and Debentures) Rules, 2014]
  2. In case of such class of companies, as prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company before the shares are redeemed. [Section 55(2)(d)]
  3. If the case does not fall under above point, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed. [Section 55(2)(d)]

The following procedure is to be followed for redemption of preference shares by a company limited by shares under Section 55 and Rule No. 9 of the Companies (Share Capital and Debentures) Rules, 2014-

  1. Verify the following points before taking decision of redeeming redeemable preference shares:-
    1. They must be redeemed only out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption;
    2. They must be fully paid-up;
    3. If shares are redeemed out of distributable profits of the Company, then before such redemption, transfer a sum equal to the nominal amount of shares to be redeemed to a reserve fund called the Capital Redemption Reserve Account from the distributable profits of the Company and the provisions of this Act on reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and
    4. The premium, if any, payable on redemption of any preference shares must be provided only out of the profits of the company in case of prescribed class of companies and in case of other companies, out of the profits of the Company or out of the company’s securities premium account, before such shares are redeemed. [Section 55(2)]
  2. Issue not less than 7 days notice and agenda of the Board meeting, or a shorter notice and agenda for when urgent business, in writing to every director of the company at his address registered with the company and call a Board Meeting to consider the proposal for the redemption of preference shares.
  3. Hold a meeting of the Board of Directors.

 

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