Redemption of Preference Share under Companies Act, 2013

A company limited by shares may, if so authorized by its articles, issue preference shares
which are liable to be redeemed within a period not exceeding twenty years from the date
of their issue subject to such conditions as may be prescribed:
A Company may issue preference shares for a period exceeding twenty years for
infrastructure projects, subject to the redemption of such percentage of shares as may be
prescribed on an annual basis at the option of such preferential shareholders:
Source of Redemption of Preference Shares:
 Preference shares can be redeemed only out of the profits available for distribution to its
shareholders as Dividend
 Preference shares can be redeemed only out of Preference shares can be redeemed
only fresh proceeds of shares issued solely for the purpose of funding the redemption of
the preference shares
Condition for Redemption of Preference Shares:
 Fully paid-up preference shares can only be redeemed.
 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 and the preference shares may be redeemed: -
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company’s option; or
(c) any time at the shareholder’s option.
Capital Redemption Reserve:
 Capital Redemption Reserve: Where the redemption of preference shares is 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.

 Utilization of CRR: 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

Company is not in position to Redeem:

 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 such amount of
preference shares as may be necessary in order to meets its obligation towards dividend
payment and also redemption of preference shares.
 Redemption of preference shares by issuing new preference shares is subject to
obtaining the consent of the preference shareholders (at least 75% of the shareholders)
and also obtaining the approval of the Tribunal for such arrangement
 The Tribunal shall order the company to immediately redeem the preference shares held
by the shareholders dissenting to such arrangement. The issue of preference shares for
purpose of redemption of unredeemed preference shares (along with the dividend) shall
not be considered as an increase in the share capital of the company
Accounting Entries on Redemption of Preference Shares