Meaning and Types of Preference Shares, Redemption of Preference Shares, Issue of Bonus Shares

1. Prof. M. C. Sharma 1
Redemption of
Preference Shares and
Bonus Issue
M. C. Sharma
Associate Professor
Department of Commerce
Shaheed Bhagat Singh Evening College
(University of Delhi), Delhi, INDIA

2. Prof. M. C. Sharma 2
Meaning of Preference Shares
Preference shares are those shares which have the two
preferential rights:
(1)A right to receive dividend at a given rate before any
dividend is paid on equity shares; subject to declaration by
the company. Rate of dividend is mentioned on the face of
the share certificate.
For example – 12% Preference Shares.
Here, 12% is rate of dividend.
(1)A right to repayment of capital before equity
shareholders at the time of liquidation of the company.

3. Prof. M. C. Sharma 3
Types of Preference Shares
• Cumulative Preference Shares
– If dividend is not paid on such shares, the arears of
dividend are carried forward and are paid in
subsequent years.
– All preference shares are cumulative unless clearly
stated to be non-cumulative.
• Non-cumulative Preference Shares
– Dividend is paid out of the each year’s profits.
– If dividend is not paid on such shares, the right to
dividend lapses.
– It is not carried as arrears.

4. Prof. M. C. Sharma 4
Types of Preference Shares (Contd.)
• Participative Preference Shares
– In addition to basic preferential rights, such shares
also carries (a) the right to participate in surplus
profits left after payment of preference and equity
dividend, and (b) in the event of winding up, the right
to participate in the surplus assets left after
repayment of preference and equity capital.

5. Prof. M. C. Sharma 5
Types of Preference Shares (Contd.)
• Non-Participative Preference Shares
– Such preference shares have only basic preferential
rights and no additional rights to participate in surplus
profits and surplus assets.

6. Prof. M. C. Sharma 6
Types of Preference Shares (Contd.)
• Convertible Preference Shares
A convertible preference share gets the right of
conversion into equity share.
• Non-convertible Preference Shares
–A non-convertible preference share does not have the
right of conversion into equity share.
–All preference shares are non-convertible unless
clearly stated to be convertible.

7. Prof. M. C. Sharma 7
Types of Preference Shares (Contd.)
• Redeemable Preference Shares
On such preference shares, the amount is refunded in
accordance with Sec. 55 of the Companies Act 2013.
• Irredeemable Preference Shares
Irredeemable preference shares can not be redeemed
during the life of the company.
A company limited by shares cannot issue irredeemable
preference shares in India.

8. Prof. M. C. Sharma 8
Redemption of Preference
Shares – Important Provisions
• Redemption of preference shares means repayment
of preference share capital to preference shareholders.
• The Companies Act 2013 allows the issue of
redeemable preference shares if articles of association
of the company so authorise or permit.
• No company limited by shares shall, after the
commencement of this Act, issue any preference shares
which are irredeemable.

9. Prof. M. C. Sharma 9
Redemption of Preference
Shares – Important Provisions
• The preference shares must be redeemed within a period 20
years from the date of issue of such shares. [Sec. 80(5A)]. To
finance infrastructure projects, a company can issue preference
shares for exceeding 20 years but not more than 30 years.
• According to rule 10 of the Companies (Shares and Debentures)
Rules 2014, the tenure of such preference shares cannot exceed
30 years and the company shall redeem every year at least 10%
of such preference shares.

10. Prof. M. C. Sharma 10
Conditions of Redemption [Sec. 55]
1. Such shares must be fully paid.
• Partly paid preference shares must be made fully
paid before redemption by making final call due
and received.
• In case of calls in arrear, such shares can not be
redeemed till they are made fully paid.

11. Prof. M. C. Sharma 11
Conditions of Redemption [Sec. 55]
2. Such shares can be redeemed out of distributable
profits or out of the proceeds of a fresh issue of shares
made for the purpose of redemption.
Distributable or divisible profits:
Profits which can be distributed as dividend.(Capital
Redemption Reserve can be created by transfer from
divisible profits only)

12. Prof. M. C. Sharma 12
• Examples Distributable or divisible profits:
– Surplus in the Profit and Loss A/c
– General Reserve or Reserve Fund
– Dividend Equalisation Reserve.
– Insurance Fund or Reserve, Workmen Compensation
Fund, Contingency Reserve, Provision for doubtful
debts, Provision for Taxation (Only in excess of the
required provision or a liability against such Reserve or
Fund can be used to create CRR.)

13. Prof. M. C. Sharma 13
• Non-distributable profits:
Profits which can not be distributed as dividend.
(Transfer to CRR is not allowed from these accounts)
• Examples:
–Securities Premium A/c
–Capital Reserve
–Pre-incorporation Profits
–Share Forfeited A/c
–Revaluation Reserve
–Profit on sale of Fixed Assets/Investments
–Debenture Redemption Reserve (DRR)
–Investment Allowance Reserve
–Development Rebate Reserve (Dev. RR)
(Investment Allowance Reserve and Dev. RR are available
for CRR, only when specified in the question)

14. Prof. M. C. Sharma 14
3. Any premium payable on redemption of such shares shall be
provided from out of the security premium account or out of the
profits.
4. When preference shares are redeemed out of the profits, an
amount equal to the face value of such shares redeemed shall
be transferred from the distributable profits to Capital
Redemption Reserve (CRR) Account.
5. The amount credited to CRR may be used by the company only
by way of issue of fully paid bonus shares.
Conditions of Redemption (Contd.)

15. Prof. M. C. Sharma 15
Calculation of Capital Redemption Reserve
(CRR) and Net Proceeds from Fresh Issue
• CRR required
= Nominal Value of Preference Shares to be redeemed – Net
Proceeds from Fresh Issue of Shares
• Net Proceeds from Fresh Issue of Shares
= Nominal Value of Shares issued (Premium on such issue, if any,
is to be ignored)
If new shares issued are partly paid, then only the paid up nominal
amount should be considered.
• Fresh Shares to be issued
= Nominal Value of Preference Shares to be redeemed – Profits
available for CRR.

16. Illustration 1:
Calculate net proceeds from fresh issue:
1. Issued 1,50,000 shares of Rs. 10 each at par
2. Issued 1,50,000 shares of Rs. 10 each at a premium of
Rs. 2 per share
3. Issued 1,50,000 shares of Rs. 10 each at par, only Rs.
8 called and paid.
4. Issued 1,50,000 shares of Rs. 10 each at a premium of
Rs. 2 per share. Only Rs. 9 including premium is called
and paid.
Prof. M. C. Sharma 16

17. Illustration 1:
Calculate net proceeds from fresh issue:
Answer:
(1)15,00,000;
(2)15,00,000;
(3)12,00,000;
(4)10,50,000.
Prof. M. C. Sharma 17

18. Illustration 2
Calculate the amount of CRR required in the following cases:
Preference Shares to Be
redeemed
Fresh issue of share
capital
1. Rs. 12,00,000 at par Rs. 10,00,000 at par
2. Rs. 15,00,000 at a premium of 5% Rs. 10,00,000 at par
3. Rs. 12,00,000 at par Rs. 9,00,000 at premium of
10%
Answer:
1. Rs. 2,00,000
2. Rs. 5,00,000
3. Rs. 3,00,000
Prof. M. C. Sharma 18

19. Journal Entries
1. If redeemable preference shares are not fully
paid, then to make them fully paid, a final call
should be made and received:
Prof. M. C. Sharma 19
(a) Pref. Share Final Call A/c
To Pref. Share Capital A/c
Dr.
(b) Bank A/c
To Pref. Share Final Call A/c
Dr.

20. Journal Entries
2. If there is calls-in-arrear on some shares:
• EITHER such amount shall be received,
• OR such shares shall be forfeited and then re-issued
before redemption.
• Entries shall be passed accordingly.
Prof. M. C. Sharma 20

21. Journal Entries (Contd.)
Prof. M. C. Sharma 21
3. For sale of assets/investments to arrange cash for
redemption
Bank A/c
To Assets or Investment A/c
Dr.
* Any loss on sale of assets/investments shall be
debited to Surplus (Profit and Loss A/c).
* Any Profit on sale of assets/investments shall be
credited to Capital Reserve.

22. Journal Entries (Contd.)
Prof. M. C. Sharma 22
4. For issue of debentures, if any
Bank A/c
To Debentures Application A/c
Dr.
Debentures Application A/c
To Debentures A/c
Dr.

23. Journal Entries (Contd.)
Prof. M. C. Sharma 23
5. For issue of new shares, if any
Bank A/c
To Share Application & Allotment A/c
Dr.
Share Application & Allotment A/c
To Share Capital A/c
To Securities Premium A/c (if any)
Dr.
6. For making due redemption
Redeemable Pref. Share Capital A/c
*Premium on Redemption on of Pref. Shares
A/c
To Preference Shareholders A/c
* If preference shares are redeemed at
premium.
Dr.
Dr.

24. Journal Entries (Contd.)
Prof. M. C. Sharma 24
7. For writing off Premium on Redemption, if any
Securities Premium A/c
Capital Reserve A/c*
General Reserve A/c
Surplus A/c
To Premium on Redemption of Pref.
Shares A/c
Dr.
Dr.
Dr.
Dr.
*
*
Above order or preference is not legally
required. It is desirable that minimum use of
free reserve or divisible profits is made for this
purpose.
Capital reserve (profit) can be used only if it
was realised in cash.

25. Journal Entries (Contd.)
Prof. M. C. Sharma 25
8. For arrangement of bank loan or bank overdraft, if required
Bank A/c
To Bank Loan or Bank Overdraft A/c
Dr.
9. For payment to Preference Shareholders
Preference Shareholders A/c
To Bank A/c
Dr.

26. Redemption of Preference Shares by
Conversion
• Preference shares may be redeemed by
conversion into equity shares. Such preference
shares are Convertible Preference Shares.
• When Preference shares are redeemed by
conversion, there is no need to create Capital
Redemption Reserve.
Prof. M. C. Sharma 26

27. Journal Entries for Redemption by Conversion
Prof. M. C. Sharma 27
1. For making due redemption
Pref. Share Capital A/c
*Prem. On Redemption of Pref. Shares A/c
To Preference Shareholders A/c
* If preference shares are redeemed at
premium.
Dr.

28. Journal Entries for Redemption by Conversion
Prof. M. C. Sharma 28
2. For issue of equity shares at par
Preference Shareholders A/c
To Equity Share Capital A/c
Dr.
3. For issue of equity shares at premium
Preference Shareholders A/c
To Equity Share Capital A/c
To Securities Premium A/c
Dr.

29. Issue of Bonus Shares
• Capital Redemption Reserve (CRR) and
Securities Premium can be used for issue of
fully paid bonus shares.
• Free reserves and surplus can be used to pay
bonus to shareholders either to issue fully paid
bonus shares or to make existing partly paid
shares as fully paid up.
Prof. M. C. Sharma 29

30. Journal Entries for Issue of Bonus Shares (Contd.)
Prof. M. C. Sharma 30
3. When Bonus to shareholders is declared
Capital Redemption Reserve A/c
Securities Premium A/c
General Reserve A/c
Surplus OR Divisible Profits A/c
To Bonus to Shareholders A/c
Dr.
Dr.
Dr.
Dr.
2. For issue of fully paid bonus shares
Bonus to Shareholders A/c
To Equity Share Capital A/c
Dr.

31. Journal Entries for Issue of Bonus Shares
Prof. M. C. Sharma 31
3. When Bonus to shareholders is used to make existing partly
paid shares as fully paid up:
(a) For making final call due
Equity Share Final Call A/c
To Equity Share Capital A/c
Dr.
(b) For adjusting bonus to shareholders against
final call due:
Bonus to Shareholders A/c
To Equity Share Final Call A/c
Dr.