redemption of preference share

PREFERENCE SHARE

Preference shares represent partial ownership in a company.

Preference Shares will carry preferential (cumulative) right to dividend, at coupon rate, when declared.

The dividend will be calculated pro rata i.e. from the date of allotment of such Preference Shares.

Preference shareholders always receive their dividends first.

Preference shareholders do not enjoy any of the voting rights.

Preference shareholders have a greater claim on the company's assets than common stockholders.

The Preference Shares will have the maximum redemption period of 20 years.

2/12/2012 A Presentation By Himanshu Arya,

Daksh Professional Education Meerut Mobile: +91-9760-888-626

1

REDEMPTION OF PREFERENCE SHARE

Only fully paid up Preference Shares will be redeemed. The redemption of Preference Shares will not be taken as reducing

the Authorised Share Capital of the Company. The Preference Shares will be redeemed at par/ at a premium. If the Preference Shares are redeemed at a premium, premium will

be provided either out of Securities Premium Account or Profit and Loss Account.

Where any Preference Shares are redeemed out of profits for dividend, which a sum equivalent to the nominal value of the Preference Shares redeemed will be transferred to the “Capital Redemption Reserve A/C”.

Where any Preference Shares are redeemed by issuing of new shares, it must be redeemed within 1 month from the date of issue of new shares & it will not be considered as increase of Authorised Share Capital. 2/12/2012

A Presentation By Himanshu Arya, Daksh Professional Education Meerut

Mobile: +91-9760-888-626 2

REDEMPTION OF PREFERENCE SHARE Capital Redemption Reserve (CRR) A/C

Creates when a company redeem or buy-back its own shares which reduces share capital.

It creates with the same with nominal value of the shares are redeemed out of profits.

Due to its creation the share capital is not reduced after redemption, - CRR A/C is converted to Share Capital.

Capital before Redemption = Capital after Redemption + CRR A/C.

Is not distributed among the shareholders. Used only for Issue of Fully Paid Up Shares. Used in paying up unissued shares to be issued to the

members as Fully Paid Bonus Shares. Redemption out of available Profit. Redemption partly out of available Profit & partly by

issuing new Shares.



3

REDEMPTION OF PREFERENCE SHARE Capital Redemption Reserve (CRR) A/C

Amount to be transferred to CRR A/C:-

In case of Redemption out of Profits:

Face Value of Preference Shares to be redeemed

In case of Redemption out of Profits & partly by issuing New Shares:

Face Value of Preference Shares to be redeemed

LESS Face Value of New Shares

LESS Discount Allowed on Issue of New Shares



4

REDEMPTION OF PREFERENCE SHARE Methods Are:

Alternative-1 Redemption out of available Profit for Dividend

Alternative-2 Redemption by issuing new Equity or Preference Shares

Alternative-3 Redemption partly out of available Profit & partly by issuing new Shares

Important Note A Company has no right to sales its Assets or issues debentures to redeem its Preference Shares.



5

REDEMPTION OF PREFERENCE SHARE Profits available for Dividend U/S 205 Profit & Loss A/C General Reserve Reserve Fund Contingency Reserve Insurance Fund Dividend Equalisation Fund Debenture Redemption Fund Voluntary Debenture Sinking Fund Workmen’s Accident Fund Workmen’s Compensation Fund

2/12/2012


Mobile: +91-9760-888-626 6


AT PAR

Issuing 20,000 8% RPS @ RS. 100 at PAR For This Obligation Co. has:

CR Balance of P&L A/C : 5,00,000

General Reserve : 3,00,000

Workmen’s Accident Fund : Sufficient Fund

Capital Reserve : 8,00,000

Security Premium A/C : 1,00,000

For This Obligation Co. Issues:

1,00,000 Equity Shares @ RS. 10 at 10% Premium

2/12/2012


Mobile: +91-9760-888-626 7


Co. has: CR Balance of P&L A/C : 5,00,000

General Reserve : 3,00,000

Workmen’s Accident Fund : 2,00,000

{20 Lack – ( 5 Lack – 3 Lack – 10 Lack)}

Capital Reserve : 8,00,000

Security Premium A/C : 1,00,000

Funds are out of profits for Dividend will be transferred to CRR A/C

P&L Appropriation A/C Dr. 5,00,000

General Reserve Dr. 3,00,000

Workmen’s Accident Fund Dr. 2,00,000

To Capital Redemption Reserve A/C 10,00,000



8


Co. issues: 1,00,000 Equity Shares @ RS. 10 at 10% Premium

Bank A/C Dr. 11,00,000

To Equity Share Capital A/C 10,00,000

To Securities Premium A/C 1,00,000

Securities Premium A/C cannot be transferred to CRR A/C.

Securities Premium A/C can be written off from the amount of paying premium on redemption of Preference Shares.



9


Co. issues: Issuing 20,000 8% RPS @ RS. 100 at PAR

Due Amount to 8% RPS Shareholders

8% Redeemable Preference Share Capital A/C Dr. 20,00,000

To Preference Shareholders A/C 20,00,000

Payment to 8% RPS Shareholders

Preference Shareholders A/C Dr. 20,00,000

To Bank A/C 20,00,000

2/12/2012


Mobile: +91-9760-888-626 10


AT PREMIUM Issuing 20,000 8% RPS @ RS. 100 at 10% Premium For This Obligation Co. has: CR Balance of P&L A/C : 4,00,000 General Reserve : 2,00,000 Capital Reserve : 5,00,000 Share Forfeiture A/C : 1,00,000 For This Obligation Co. Issues: 1,00,000 Equity Shares @ RS. 10 at 10% Premium 4,000 9% Preference Shares @ RS. 100 at 20% Premium

2/12/2012


Mobile: +91-9760-888-626 11


Co. has: CR Balance of P&L A/C : 4,00,000 General Reserve : 2,00,000 Capital Reserve : 5,00,000 Share Forfeiture A/C : 1,00,000 Funds are out of profits for Dividend will be transferred to CRR A/C

P&L Appropriation A/C Dr. 4,00,000 General Reserve Dr. 2,00,000 To Capital Redemption Reserve A/C 10,00,000

2/12/2012


Mobile: +91-9760-888-626 12


Co. issues: 1,00,000 Equity Shares @ RS. 10 at 10% Premium 4,000 9% Preference Share @ RS. 100 at 20% Premium

Bank A/C Dr. 11,00,000 To Equity Share Capital A/C 10,00,000 To 9% Pref Share Capital A/C 4,00,000 To Securities Premium A/C 1,80,000 Securities Premium A/C cannot be transferred to CRR A/C. Securities Premium A/C can be provided for the amount of

paying premium on redemption of Preference Shares.

2/12/2012


Mobile: +91-9760-888-626 13


Premium on Preference Share Redemption will be provided out of “Securities Premium A/c” and/or “Profit & Loss A/c”

Securities Premium A/c Dr. 1,80,000

Profit & Loss A/C Dr. 20,000

To Premium on Preference Share Redemption A/C 2,00,000



14


Co. issues: Issuing 20,000 8% RPS @ RS. 100 at 10% Premium

Due Amount to 8% RPS Shareholders 8% Redeemable Preference Share Capital A/C Dr. 20,00,000 Premium on Preference Share Redemption A/C Dr. 2,00,000 To Preference Shareholders A/C 22,00,000

Payment to 8% RPS Shareholders Preference Shareholders A/C Dr. 22,00,000 To Bank A/C 22,00,000



15


AT PREMIUM Issuing 30,000 10% RPS @ RS. 100 at 10% Premium For This Obligation Co. has: CR Balance of P&L A/C : 5,00,000 General Reserve : 2,00,000 Capital Reserve : 5,00,000 Share Forfeiture A/C : 1,00,000 For This Obligation Co. Issues: 1,00,000 Equity Shares @ RS. 10 at 10% Premium 4,000 9% Preference Shares @ RS. 100 at 20% Premium



16


AT PREMIUM Issuing 15,000 10% RPS @ RS. 100 at 10% Premium For This Obligation Co. has: CR Balance of P&L A/C : Sufficient Balance For This Obligation Co. Issues: 50,000 Equity Shares @ RS. 10 at 10% Discount 5,000 9% Preference Shares @ RS. 100 at 10% Premium 10,000 12% Debenture @ RS. 10 at Par For This Obligation Co. Sales: Investment costing 1,25,000 at 1,18,000



17


Co. issues: 50,000 Equity Shares @ RS. 10 at 10% Discount 5,000 9% Preference Shares @ RS. 100 at 10% Premium 10,000 12% Debenture @ RS. 10 at Par

Bank A/C Dr. 11,50,000 Discount on Issue of Shares Dr. 50,000 To Equity Share Capital A/C 5,00,000 To 9% Pref Share Capital A/C 5,00,000 To 12% Debentures A/C 1,00,000 To Securities Premium A/C 50,000 Securities Premium A/C cannot be transferred to CRR A/C. Securities Premium A/C can be provided for the amount of paying

premium on redemption of Preference Shares.



18


Co. sales: Investment Costing 1,25,000 at 1,18,000

Bank A/C Dr. 1,18,000

Loss on Sales of Investment Dr. 7,000

To Investment A/C 1,25,000 This Loss or Profit on sales of Assets is transferred to P&L A/C.

Profit & Loss A/C Dr. 7,000

To Loss on Sales of Investment 7,000



19


Premium on Preference Share Redemption will be provided out of “Securities Premium A/c” and/or “Profit & Loss A/c”

Securities Premium A/c Dr. 50,000

Profit & Loss A/C Dr. 1,00,000

To Premium on Preference Share Redemption A/C 1,50,000



20


Funds are out of profits for Dividend will be transferred to CRR A/C

P&L Appropriation A/C Dr. 5,50,000 To Capital Redemption Reserve A/C 5,50,000 Payment to be made 15,00,000 LESS Funds from Issuing Equity Shares 4,50,000 LESS Funds from Issuing 9% Pref Shares 5,00,000 9,50,000

5,50,000



21


Co. issues: Issuing 15,000 10% RPS @ RS. 100 at 10% Premium

Due Amount to 10% RPS Shareholders 10% Redeemable Preference Share Capital A/C Dr. 15,00,000 Premium on Preference Share Redemption A/C Dr. 1,50,000 To Preference Shareholders A/C 16,50,000

Payment to 10% RPS Shareholders Preference Shareholders A/C Dr. 16,50,000 To Bank A/C 16,50,000



22


Calculate the Face Value of Shares to be issued For the obligation of Redemption. Suppose the face value of shares to be issued = x Face Value of Pref Shares to be redeemed ADD Premium on redemption = Existing premium in the balance sheet ADD Profits available for dividend ADD x ADD Premium on new issue (x * Premium Rate) OR LESS Discount on new issue (x * Discount Rate) 2/12/2012


Mobile: +91-9760-888-626 23

BONUS SHARES

Shares without Cost for which nothing is paid by shareholders.

Issued to only Existing Shareholders. Issued in a ratio of the shares an investor hold. Usually announced by the company with a record date. Usually gives bonus shares as a substitute of dividend

payouts. The face value of the share doesn’t get change after

bonus. Bonus shares increases the number of shares in the market which goes down EPS.



24

WHY BONUS SHARES

Company has more accumulated more reserve. Accumulated Reserve > Normally Necessity. Company shares this Excess Reserve with their Existing

Shareholders in the form of Bonus Shares. Company is not in position to pay Cash Bonus or

Dividend due to Insufficient Cash. Cash Bonus affects the Working Capital & future plans

of Capatilisation. Issued Capital is Increased. Assets remain Intact. Liquidity of the company is not affected.



25

CAPITALIZATION OF PROFIT

Conversion of Retained Earnings into Paid-Up Capital.

Profits or Reserves become the part of Issued Capital.

By issuing bonus shares to current shareholders in proportion to their shareholdings.

By Making Partly Paid Shares as Fully Paid without getting Cash from the shareholders.

By issuing a stock dividend.



26

METHODS OF ISSUING BONUS SHARES

Aletrnative-1

Capitalisation of Profit by Issuing Bonus Shares

Issuing of FREE Fully Paid Shares as Bonus Shares.

Alternative-2

Capitalisation of Profit by Without Issuing Bonus Shares

Making Partly Paid Shares as Fully Paid without getting Cash from the shareholders.

2/12/2012


Mobile: +91-9760-888-626 27

BUY-BACK

Section 77A Provides the provisions of Buy-Back. A company buy its own shares. Shares can buy-back from:- Open Market through Book Building Process &

Stock Exchanges. Existing Equity Shareholders on a Pro-Rata basis. Odd Lot Shareholders where the lot of securities of a public

company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange.

Employees of the company pursuant to a scheme of Stock Option or Sweat Equity.

2/12/2012


Mobile: +91-9760-888-626 28

ACCOUNTING TREATEMENT OF BONUS SHARES

Declaration of bonus from Profits and Reserves of LAST YEAR

On Declaration of Bonus Shares:- Capital Redemption Reserve A/C Dr. Capital Reserve A/C Dr. Securities Premium A/C Dr. General Reserve A/C Dr. P&L Appropriation A/C Dr. To Bonus to Shareholders A/C



29

ACCOUNTING TREATEMENT OF BONUS SHARES

Declaration of bonus from Profits and Reserves of LAST YEAR On Issue of Bonus Shares at PAR :-

Bonus to Shareholders A/C Dr. To Equity Share Capital A/C On Issue of Bonus Shares at PREMIUM :-

Bonus to Shareholders A/C Dr. To Equity Share Capital A/C To Securities Premium A/C



30

WHY BUY-BACK

To increase promoters holding.

To Increase earning per share.

To Support share value.

To pay surplus cash not required by business.

To Thwart takeover bid.

To Rationalise the capital structure by writing off.

capital not represented by available assets.



31

RESOURCES OF BUY-BACK

Free reserves- A sum equal to the nominal

value of the buy-back shares shall be transferred to the CRR A/C.

Securities Premium Account

Proceeds of any shares or securities –

A Company cannot buy-back its shares or securities out of the proceeds of an earlier issue of the same kind of shares or securities.



32

CONDITIONS FOR BUY-BACK

Should be Authorized by the Articles of Association of the Company.

The Special Resolution is to be passed in the General Meeting of shareholders.

Less Than 25% of the Total Paid-UP Capital & Free Reserves of the company.

DEBT-Equity Ratio should not more than 2:1 after such buy-back.

All the shares for buy-back should be Fully Paid-Up. Should be completed within 12 months from the date

of passing the Special Resolution.



33

redemption of preference share

Economy & Finance