Corporate Accounting and Auditing · Redemption of Preference Shares, Issue and Redemption of Debentures

Redemption of Preference Shares under Section 55

Updated 10 October 2026 · Fact-checked

Redemption of preference shares means repaying preference shareholders and cancelling their shares. Under Section 55, only fully paid, redeemable shares can be redeemed, within 20 years (infrastructure projects excepted), out of divisible profits or a fresh issue of shares. Profit-funded redemption needs a transfer to Capital Redemption Reserve equal to the nominal value redeemed.

Understand Redemption of Preference Shares

A preference share carries a preferential right to a fixed dividend and to repayment of capital on winding up (Section 43). Redemption means the company repays the shareholders and the shares cease to exist.

Section 55 sets the rules. A company limited by shares cannot issue irredeemable preference shares. If its articles authorise it, it may issue shares redeemable within 20 years of issue. For infrastructure projects, a longer period is allowed, with a prescribed percentage redeemed each year at the option of the holders.

The logic is creditor protection. Paying back shareholders reduces the capital cushion for creditors. So the law lets you redeem only from money that could otherwise be paid as dividend (divisible profits), or from the proceeds of a fresh issue of shares made for this purpose. Shares must also be fully paid before redemption.

If you redeem out of profits, capital is shrinking, so you must keep the amount in the company. You transfer a sum equal to the nominal amount of shares redeemed out of profits to the Capital Redemption Reserve (CRR). If you redeem out of a fresh issue, no CRR is needed on that part.

If a premium is payable on redemption, check which clause of Section 55(2)(d) applies. Under Section 55(2)(d)(i), a company of the prescribed class whose financial statements comply with the accounting standards prescribed under Section 133 must provide the premium out of profits before the shares are redeemed. A company not falling under clause (i) comes under Section 55(2)(d)(ii) and may provide it out of profits or out of the securities premium account.

Section 52(2)(d) allows the securities premium account to be applied for the premium on redemption in general. But for a company covered by Section 55(2)(d)(i), the rule in Section 55 requires profits.

The class of company is a matter of prescription under the Act, and the question should state which clause applies. If it does not, follow this exam convention: state your assumption clearly and provide the premium out of profits, which is the safer course.

Key rules to remember

Sources of redemption: Redemption only out of (a) profits available for dividend, or (b) proceeds of a fresh issue of shares made for the purpose; Section 55(2), further proviso, clause (a). Not out of capital, revaluation reserve or CRR.
Fully paid condition: Redeem only fully paid shares; Partly paid shares must first have the calls made and paid up.
Maximum period: Redemption within 20 years from the date of issue; Longer period allowed only for infrastructure projects, with prescribed annual redemption at the holders' option.
CRR transfer: CRR = Nominal value of shares redeemed out of profits = Nominal value redeemed − Proceeds of fresh issue applied to the redemption (taken at nominal value of shares issued); Section 55(2)(c) requires a transfer out of profits equal to the nominal amount of shares redeemed out of profits. Problems take the fresh issue at nominal value, so any premium on the fresh issue is not netted off. The premium payable on redemption is provided separately under Section 55(2)(d). If the result is zero or negative, no CRR is needed.
Premium on redemption: Premium payable = (Redemption price − Nominal value) × Number of shares; Provide for it before the shares are redeemed. A company under Section 55(2)(d)(i) must use profits. A company under Section 55(2)(d)(ii) may use profits or securities premium.
Use of CRR: CRR may be applied in paying up unissued shares as fully paid bonus shares. Otherwise it is treated like paid-up share capital under the reduction provisions.; Sections 55(4), 63(1)(iii), 69(2) and 55(2)(c). It cannot be used to pay dividend or the redemption premium.

How to solve Redemption of Preference Shares questions

Use the same sequence for every redemption problem. It keeps the entries and the CRR figure correct.

1Check eligibility: shares are redeemable, authorised by the articles, within 20 years and fully paid. Call any unpaid amount first.
2Find the amount to redeem: number of shares × nominal value, and the premium, if any, at the redemption price.
3Decide the sources: fresh issue proceeds first (at nominal value, if the question says so), and the balance from divisible profits.
4Compute CRR: it equals the nominal value redeemed out of profits, that is, nominal value redeemed minus the proceeds of the fresh issue applied to the redemption (taken at nominal value). If the fresh issue is at least the nominal amount redeemed, CRR is nil.
5Provide for the premium on redemption from securities premium or profits, as the question and Section 55(2)(d) allow.
6Pass entries: fresh issue, premium provision, transfer to CRR, transfer of preference share capital to the redeemable account, and payment.
7Check that the profits left after the CRR transfer are not negative, and then prepare the balance sheet.

Quickest way: Two-line CRR check

When to use it: Use it when the question asks only for CRR or for the effect on reserves, and not for full journal entries.

Write: nominal value of shares redeemed.
Subtract: proceeds of the fresh issue applied to the redemption, taken at nominal value of the shares issued. The result is the nominal amount redeemed out of profits, which is the CRR.
Premium on redemption is provided separately under Section 55(2)(d), out of profits or securities premium as the clause allows, and does not go into the CRR formula.
Verify that the available profits cover CRR plus any premium charged to profits.

Common mistakes in Redemption of Preference Shares

Redeeming partly paid shares without making them fully paid first.
Students focus on the redemption entries and skip the condition in the question.
Fix: Check the paid-up amount first. If calls are unpaid, record the call money before redemption, as the facts allow.
Including the premium received on the fresh issue when computing CRR.
The fresh issue is treated as one lump sum.
Fix: Use the nominal value of the fresh shares issued only. Premium on that issue goes to securities premium.
Transferring CRR equal to the full redemption amount, including the premium.
The premium is confused with the nominal amount.
Fix: Section 55(2)(c) refers to the nominal amount of shares redeemed out of profits. The premium on redemption is provided separately under Section 55(2)(d).
Using CRR to pay the redemption premium or cash dividend.
CRR looks like another reserve.
Fix: CRR may be applied in paying up bonus shares (Sections 55(4), 63(1)(iii), 69(2)). Otherwise it is treated like paid-up share capital under the reduction provisions. It is not available for dividend or premium. Treat it as a locked reserve.
Using securities premium for the redemption premium without checking the class of company.
Section 52(2)(d) is remembered, but the Section 55(2)(d)(i) condition is missed.
Fix: If the question says the company is of the prescribed class whose financial statements comply with the accounting standards under Section 133, provide the premium out of profits. Use securities premium only if the company falls under Section 55(2)(d)(ii). If the question does not say, state your assumption.
Using revaluation reserve as a source of redemption.
Students treat all reserves as free.
Fix: Use only profits available for dividend, such as general reserve and the balance of the profit and loss account, or a fresh issue.
Forgetting that no CRR is needed when a fresh issue covers the whole nominal redemption.
Students apply a standard format blindly.
Fix: Compute the nominal amount redeemed out of profits by subtraction. If the answer is zero or negative, no CRR transfer is made.

Worked examples

Example 1

Anand Textiles Ltd has 5,000 8% redeemable preference shares of ₹100 each, fully paid. It redeems them at par. To fund this, it issues 2,000 equity shares of ₹100 each at par. General reserve is ₹4,00,000 and the profit and loss balance is ₹1,50,000. Find the CRR transfer and state the source of the balance.

Show the solution

Nominal value redeemed = 5,000 × ₹100 = ₹5,00,000.
Fresh issue at nominal value = 2,000 × ₹100 = ₹2,00,000.
Balance to be met from profits = ₹5,00,000 − ₹2,00,000 = ₹3,00,000.
CRR = ₹3,00,000, transferred from general reserve or profit and loss, as divisible profits.
Available divisible profits = ₹4,00,000 + ₹1,50,000 = ₹5,50,000, which covers ₹3,00,000.

Answer: CRR to be created is ₹3,00,000. The redemption is funded by ₹2,00,000 from the fresh issue and ₹3,00,000 from profits.

Example 2

Bharat Metals Ltd has 3,000 9% redeemable preference shares of ₹100 each, fully paid. They are redeemed at a premium of 10%. No fresh issue is made. The company's financial statements comply with the accounting standards prescribed under Section 133, so Section 55(2)(d)(i) applies. Securities premium is ₹1,00,000 and general reserve is ₹5,00,000. Show the amounts for premium, CRR and the cash payment, with the sources.

Show the solution

Nominal value = 3,000 × ₹100 = ₹3,00,000.
Premium = 10% × ₹3,00,000 = ₹30,000.
Total payment = ₹3,00,000 + ₹30,000 = ₹3,30,000.
No fresh issue, so CRR = ₹3,00,000, transferred from general reserve.
Under Section 55(2)(d)(i), the premium of ₹30,000 must be provided out of profits before redemption. Here it is charged to general reserve. Securities premium is not used.
General reserve left = ₹5,00,000 − ₹3,00,000 (CRR) − ₹30,000 (premium) = ₹1,70,000. Securities premium stays at ₹1,00,000.

Answer: CRR is ₹3,00,000 and the premium of ₹30,000 is provided out of profits (general reserve). Cash paid to shareholders is ₹3,30,000. General reserve left is ₹1,70,000.

Exam tips

Read the facts for source words such as fresh issue, profits and securities premium, then fix the CRR figure before any entry.
In the MCQ, remember the conditions: fully paid, redeemable, within 20 years, and a source of profits or fresh issue. Options that say 'out of capital' are wrong.
For written answers, show the working for nominal value, premium, fresh issue and CRR in a small statement. Step marks follow this working.
State the legal basis in one line, for example, Section 55 with CRR, so the examiner sees the rule behind your numbers.
Check whether the fresh issue is at par or at a premium, since only the nominal value counts for CRR.

Practice questions from Redemption of Preference Shares, Issue and Redemption of Debentures

Redemption of Preference Shares in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Redemption of Preference Shares: frequently asked questions

Can a company issue irredeemable preference shares?

No. Section 55(1) says a company limited by shares cannot issue irredeemable preference shares after the Act commenced. Shares must be redeemable within 20 years, with a longer period permitted only for infrastructure projects.

What are the permitted sources of redemption?

Shares can be redeemed only out of profits that would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purpose of redemption.

When is Capital Redemption Reserve created?

When shares are redeemed out of profits, a sum equal to the nominal amount redeemed from those profits is transferred to CRR. If the fresh issue covers the full nominal amount, no CRR is needed.

Can partly paid preference shares be redeemed?

No. Section 55 states that shares cannot be redeemed unless they are fully paid. The company must first get the unpaid amount called up and paid.

What can CRR be used for?

CRR may be applied in paying up unissued shares as fully paid bonus shares. Section 55(4) allows this despite the other restrictions in the section, and Sections 63(1)(iii) and 69(2) also refer to it. Otherwise it is treated like paid-up share capital under the reduction provisions. It cannot be used to pay dividend or the redemption premium.