Skip to content

CS Executive · Company Law and Practice · Share and Share Capital - Concepts

Orchid Power Ltd issued 5,00,000 redeemable preference shares of Rs 10 each, fully paid, and proposes to redeem them wholly out of its distributable profits, with no fresh issue. Under Section 55, what must the company do?

The company must transfer a sum equal to the nominal amount of the shares redeemed, here Rs 50 lakh, out of profits to the Capital Redemption Reserve Account. This is because redemption out of profits requires the capital to be maintained through that reserve, and premium is dealt with separately.

  1. ATransfer Rs 50 lakh from those profits to the Capital Redemption Reserve AccountCorrect
  2. BTransfer only the premium payable on redemption to the Capital Redemption Reserve Account
  3. CMake no transfer, since redemption is not a reduction of capital
  4. DTransfer a sum equal to the nominal value to the Securities Premium Account

Explanation

Nominal amount is 5,00,000 x Rs 10 = Rs 50 lakh. Section 55(2)(c) requires a sum equal to the nominal amount of shares redeemed out of profits to be transferred to the Capital Redemption Reserve Account. Premium is provided for separately, so option B is wrong. The reserve is treated like paid-up capital for reduction provisions, so option C is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Share and Share Capital - Concepts shows your real accuracy, how long you take and where you lose marks.

Practise Share and Share Capital - ConceptsFree diagnostic mock

More Share and Share Capital - Concepts questions