Redemption of Preference Shares Notes, Corporate Accounting Notes B.Com 2nd & 4th Sem CBCS Pattern

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

3. BUY-BACK OF 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

2. CASH FLOW STATEMENT

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

ACCOUNTS OF HOLDING COMPANY COMPLETE NOTES