Discuss the provision of Section 80 A of the companies act 1956 with regard to redemption of redeemable Preference Shares.
Redemption is the process of repaying an obligation, usually at prearranged amount and times. Redemption of preference shares means paying back (or repayment to) preference shareholders their money.
The following important provisions regarding the redemption of preference shares are given under section 80 of. the Companies Act:
Such shares cannot be redeemed unless they are fully paid up. In other words partly paid-up shares cannot be redeemed.
Such shares can be redeemed either out of profits which would be available for dividend i.e., divisible profit* or out of the proceeds of a fresh issue of shares made with the object of redemption.
Divisible Profits i.e., profits available for distribution as dividend. Some of the examples of divisible profits are as under:
General Reserve, Reserve Fund, Dividend Equalization Fund, Insurance Fund, Workman’s Compensation Fund. Workman’s Accident Fund, Profit & Loss Account.
When such shares are redeemed out of divisible profits, an amount equivalent to the nominal value of the share so redeemed, must be transferred out of divisible profits to Capital Redemption Reserve Account.
The Capital Redemption Reserve Account may be applied by the company in issuing fully paid bonus shares to the members of the company.
The premium, if any payable on redemption shall have been provided for out of the profit (whether divisible or not e.g., Capital Reserve) of the company or out of the company’s Securities Premium Account, before the shares are redeemed.
Points to Remember:
- Securities premium money out of a fresh issue cannot be treated as Proceeds.
- ‘Proceeds’ in connection with issue of shares at a discount would mean only the net amount received, that is, face value less discount.
- The redemption of preference share by a company shall not be taken as reducing the amount of its authorized share capital.