CONDITIONS OF REDEMPTION

CONDITIONS OF REDEMPTION: Section 55 lays down the following conditions for the redemption of

preference shares, namely:

1. Such shares must be fully paid-up. If they are not fully paid up then they must be made fully paid-up

before redemption.

2. Preference shares may be redeemed at par or at premium.

3. Such shares can be redeemed out of divisible or distributable profits (i.e. profits which would be

available for dividends) or out of the proceeds of a fresh issue of shares made for the purpose of

redemption.

4. Amount equivalent to face value of redeemable preference shares must be raised -- by an issue of

shares(equity or preference) or by transferring the equivalent amount from the free reserves to Capital

redemption reserve A/c or by applying both the orders.

Imp. Note- Free reserves/ divisible or distributable profits include profit and loss A/c, general reserve,

retained earning, surplus, dividend Equalization fund/reserve, excess provision than actually required

(e.g. workmen compensation fund, Accident compensation Fund, insurance fund, reserve/provision for

doubtful debts and provision for taxation)

Non- free reserves include security premium, Revaluation reserve, capital reserves, capital Redemption

Reserves, debentures redemption reserve e.t.c Meaning of Proceeds of fresh issue -

(I) If shares are issued at premium- does not include security premium received with issue of shares

because various uses of security premium has been specifically mentioned U/S 52

(II) If shares are issued at Par- It is the actual amount received (i.e. par Value)

Capital Redemption Reserve Account-According to Section 55, when preference shares are redeemable

out of divisible profit then amount equivalent to nominal value of redeemable shares must be

transferred to Capital Redemption Reserve Account out of free reserves. Capital Redemption Reserve

(CRR) A/c can be used by the company only for the purpose of issuing fully paid bonus shares to its

members/ Shareholders.