Redemption
of Preference Shares
Corporate Accounting Notes
B.Com 2nd and 4th Sem CBCS Pattern
Preference Shares Meaning
Preference shares: Sec. 43 (b) of the Companies Act, 2013 defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. Thus, both the preferential rights viz.
(a) Preference in
payment of dividend and
(b) Preference in
repayment of capital in case of winding up of the company, must attach to
preference shares.
The rate of dividend on these shares is fixed
and the dividend on these shares must be paid before any dividend is paid to
ordinary shares. Directors, however, may decide not to pay any dividend to any
class of shareholders even if there are sufficient profits. But, if any how,
they decide to pay the dividend, preference shareholders will get the priority
to pay the ordinary shareholders.
Features of Prerence Shares
Following are the
basic features of preference share:
a)
Rate of dividend is fixed.
b)
Preference shareholders get preference in payment
of dividend over equity shareholders.
c)
Preference shareholders will get preference in redemption
of capital in case of winding up of a company.
d)
No voting rights and right to participate in
management to the preference shareholders.
e)
Preference shares can be converted into equity
shares.
Classification of Preference Shares
Preference shares may be classified
according to the rights attached to them as follows:
(a) On
the basis of dividend: Cumulative and Non-cumulative preference shares
Cumulative
preference shares are those which have the right to receive arrear of dividend
before the dividend is paid to the equity shareholders.
Non-cumulative
preference shares are those which do not have the right to receive arrear of
dividends.
(b) On
the basis of participation: Participating and non-Participating preference
shares
Participating
preference shares are those which have the rights to participate in remaining
profits after payment of dividends to the equity shareholders.
Non-Participating
preference shares are those which do not have the rights to participate in
remaining profits after payment of dividends to the equity shareholders.
(c) On
the basis of conversion: Convertible and Non-Convertible preference shares
Convertible
preference shares are those which have the right to be converted into equity
shares.
Non-convertible
preference shares are those which do not have the right to be converted into
equity shares.
(d) On
the basis of redemption: Redeemable and Irredeemable preference shares
Redeemable
preference shares are those which are redeemable after the expiry of specific
period of time.
Irredeemable
preference shares are those which are not redeemed by the company except in
case of winding up.
Advantages of Preference shares
1.
Helpful in raising
long term capital for a company.
2.
There is no need to
mortgage property on these shares.
3.
Redeemable
preference shares have the added advantages of repayment of capital whenever
there is surplus in the company.
4.
Rate of return is
guaranteed.
Disadvantages of Preference shares
1.
Permanent burden on
the company to pay a fixed rate of dividend before paying anything on the other
shares.
2.
Not advantageous to
investors from the point of view of control and management as preferences
shares do not carry voting rights.
3.
Compared to other
fixed interest bearing securities such as debentures, usually the cost of raising
the preference share capital is higher.
Conditions for redemption of Preference Shares:
Under section 55 of the Companies Act, 2013, a company should
have to follow the conditions:
1.
No company limited by
shares shall, after the commencement of this Act, issue any preference shares
which are irredeemable.
2.
A company limited by
shares may, if so authorised 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.
3.
No authorization is
required in the articles to redeem the preference shares of a company.
4.
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.
5.
The redeemable
preference shareholders should be paid out of undistributed profit/
distributable profit or out of proceeds of fresh issue of shares for the
purpose of redemption.
6.
If the shares are
redeemed at a premium, it should be should be provided
for out of the profits of the company or out of the company’s securities
premium account, before such shares are redeemed.
7.
If the shares are
redeemed out of undistributed profit, the nominal value of share capital, so
redeemed should be transferred to Capital Redemption Reserve (CRR) Account.
This is also known as capitalization profit. Transfer
to capital redemption reserve account is allowed from these profits. (i.e.
Profits otherwise available for dividend)
a)
General reserve
b)
Reserve fund
c)
Dividend equalisation fund
d)
Insurance fund
e)
Workmen’s compensation fund
f)
Workmen’s accident fund
g)
Voluntary debenture redemption
account
h)
Voluntary debenture sinking
fund
i)
Profit and loss account.
Transfer to capital
redemption reserve account is not allowed from these profits. (i.e. Profits
otherwise not available for dividend)
a)
Securities premium account
b)
Forfeited shares account
c)
Profit prior to incorporation
d)
Capital reserve
e)
Development rebate
reserve
8.
The proceeds from
fresh issue of debentures cannot be utilized for redemption.
9.
The amount of
capital reserve cannot be used for redemption of preference shares.
10.
CRR may be utilised
only for the purpose of issuing fully paid bonus shares to the members.
CORPORATE ACCOUNTING CHAPTER WISE NOTES
Unit-I: Shares & Debentures
1. ISSUE OF SHARES AND SHARE CAPITAL
2. RIGHTS SHARES AND BONUS SHARES
4. REDEMPTION OF PREFERENCE SHARES
5. ISSUE AND REDEMPTION OF DEBENTURES
Unit II: Preparation of financial statements of companies
1. FINAL ACCOUNTS OF COMPANIES
2. ACCOUNTS OF BANKING COMPANIES
Unit-III: Valuations of Goodwill and Shares & Cash Flow Statement
1. VALUATIONS OF GOODWILL AND SHARES
Unit-IV: Amalgamation, External Reconstruction and Internal Reconstruction
1. AMALGAMATION AND EXTERNAL RECONSTRUCTION
2. INTERNAL RECONSTRUCTION AND CAPITAL REDUCTIONS
Unit-V: Accounts of Holding Companies