redemption of preference share

A Presentation By Himanshu Arya, Daksh Professional Education Meerut Mobile: +91-9760-888-626

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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.

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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.

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REDEMPTION OF PREFERENCE SHARECapital 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.2/12/2012


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REDEMPTION OF PREFERENCE SHARECapital 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

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REDEMPTION OF PREFERENCE SHAREMethods 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.

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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

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AT PARIssuing 20,000 8% RPS @ RS. 100 at PARFor This Obligation Co. has:

CR Balance of P&L A/C : 5,00,000General Reserve : 3,00,000Workmen’s Accident Fund : Sufficient FundCapital Reserve : 8,00,000Security Premium A/C : 1,00,000

For This Obligation Co. Issues:1,00,000 Equity Shares @ RS. 10 at 10% Premium

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REDEMPTION OF PREFERENCE SHARECo. has:

CR Balance of P&L A/C : 5,00,000General Reserve : 3,00,000Workmen’s Accident Fund : 2,00,000

{20 Lack – ( 5 Lack – 3 Lack – 10 Lack)}Capital Reserve : 8,00,000Security 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. 5,00,000General Reserve Dr. 3,00,000Workmen’s Accident Fund Dr. 2,00,000

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

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REDEMPTION OF PREFERENCE SHARECo. issues:

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

Bank A/C Dr. 11,00,000To Equity Share Capital A/C 10,00,000To 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.

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REDEMPTION OF PREFERENCE SHARECo. 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. 20,00,000To Bank A/C 20,00,000

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AT PREMIUMIssuing 20,000 8% RPS @ RS. 100 at 10% PremiumFor This Obligation Co. has:

CR Balance of P&L A/C : 4,00,000General Reserve : 2,00,000Capital Reserve : 5,00,000Share Forfeiture A/C : 1,00,000

For This Obligation Co. Issues:1,00,000 Equity Shares @ RS. 10 at 10% Premium4,000 9% Preference Shares @ RS. 100 at 20% Premium

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Co. has:CR Balance of P&L A/C : 4,00,000General Reserve : 2,00,000Capital Reserve : 5,00,000Share Forfeiture A/C : 1,00,000


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

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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. 11,00,000To Equity Share Capital A/C 10,00,000To 9% Pref Share Capital A/C 4,00,000To 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.

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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. 1,80,000Profit & Loss A/C Dr. 20,000 To Premium on Preference Share Redemption A/C 2,00,000

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


8% Redeemable Preference Share Capital A/C Dr. 20,00,000Premium on Preference Share Redemption A/C Dr. 2,00,000



Preference Shareholders A/C Dr. 22,00,000

To Bank A/C 22,00,000

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AT PREMIUMIssuing 30,000 10% RPS @ RS. 100 at 10% PremiumFor This Obligation Co. has:

CR Balance of P&L A/C : 5,00,000General Reserve : 2,00,000Capital Reserve : 5,00,000Share Forfeiture A/C : 1,00,000

For This Obligation Co. Issues:1,00,000 Equity Shares @ RS. 10 at 10% Premium4,000 9% Preference Shares @ RS. 100 at 20% Premium

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AT PREMIUMIssuing 15,000 10% RPS @ RS. 100 at 10% PremiumFor This Obligation Co. has:CR Balance of P&L A/C : Sufficient BalanceFor This Obligation Co. Issues:50,000 Equity Shares @ RS. 10 at 10% Discount5,000 9% Preference Shares @ RS. 100 at 10% Premium10,000 12% Debenture @ RS. 10 at ParFor This Obligation Co. Sales:Investment costing 1,25,000 at 1,18,0002/12/2012


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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. 11,50,000Discount on Issue of Shares Dr. 50,000

To Equity Share Capital A/C 5,00,000To 9% Pref Share Capital A/C 5,00,000To 12% Debentures A/C 1,00,000To 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.

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

Bank A/C Dr. 1,18,000Loss 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. 7,000To Loss on Sales of Investment 7,000

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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. 50,000Profit & Loss A/C Dr. 1,00,000 To Premium on Preference Share Redemption A/C 1,50,000

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P&L Appropriation A/C Dr. 5,50,000 To Capital Redemption Reserve A/C 5,50,000

Payment to be made 15,00,000LESS Funds from Issuing Equity Shares 4,50,000

LESS Funds from Issuing 9% Pref Shares 5,00,000 9,50,000 5,50,000

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


10% Redeemable Preference Share Capital A/C Dr. 15,00,000Premium on Preference Share Redemption A/C Dr. 1,50,000



Preference Shareholders A/C Dr. 16,50,000

To Bank A/C 16,50,000

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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 redeemedADD Premium on redemption

=Existing premium in the balance sheet

ADD Profits available for dividendADD xADD Premium on new issue (x * Premium Rate) ORLESS Discount on new issue (x * Discount Rate)2/12/2012


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BONUS SHARESShares 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.

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WHY BONUS SHARESCompany 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.2/12/2012


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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.

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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


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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.

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ACCOUNTING TREATEMENT OF BONUS SHARES

Declaration of bonus from Profits and Reserves of LAST YEAROn 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

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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/CTo Securities Premium A/C

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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.

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RESOURCES OF BUY-BACK

Free reserves- A sum equal to the nominalvalue of the buy-back shares shall be transferred to the CRR A/C.

Securities Premium AccountProceeds 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.

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CONDITIONS FOR BUY-BACKShould 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.2/12/2012