METHODS OF REDEMPTION OF FULLY PAID UP SHARES

METHODS OF REDEMPTION OF FULLY PAID- UP SHARES

• Redemption of preference shares means repayment by the company of the obligation on account of shares issued.
•  According to the Companies Act, 2013, preference shares issued by a company must be redeemed within the maximum period (normally 20 years) allowed under the Act.
•  Thus, a company cannot issue irredeemable preference shares. Section 55 of the Companies Act, 2013, deals with provisions relating to redemption of preference shares. It ensures that there is no reduction in shareholders’ funds due to redemption and, thus, the interest of outsiders is not affected. 
• For this, it requires that either fresh issue of shares is made or distributable profits are retained and transferred to ‘Capital Redemption Reserve Account’. 
• The rationale behind these provisions is to protect the interest of outsiders to whom the amount is payable before redemption of preference share capital. The interest of outsiders is protected if the nominal value of capital redeemed is substituted, thus, ensuring the same amount of shareholders fund.
•  In case of redemption of preference shares out of proceeds of a fresh issue of shares, replacement of capital and tangible assets is obvious. But, if redemption is done out of distributable profits, replacement of capital is ensured in an indirect manner by retention of profit by transfer to Capital Redemption Reserve. 
• In this case, the amount which would have gone to shareholders in the form of dividend is retained in the business and is used for settling the claim of preference shareholders. Thus, there is no additional claim on net assets of the Company. 
• The transfer of divisible profits to Capital Redemption Reserve makes them non-distributable profits. As Capital Redemption Reserve can be used only for issue of fully paid bonus shares, profits retained in the business ultimately get converted into share capital. 
• Security cover available to outside stakeholders depends upon called-up capital as well as uncalled capital to be demanded by the company as per its requirements. 
• To ensure that the interests of outsiders are not reduced, Section 55 provides for redemption of only fully paid-up shares. 
• From the above paras, it can be concluded that the ‘gap’ created in the company’s capital by the redemption of redeemable preference shares much be filled in by: 

              (a) the proceeds of a fresh issue of shares;

              (b) the capitalisation of undistributed profits; or

              (c) a combination of (a) and (b).