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

Under section 55 of the Companies Act, 2013, which statement about redeeming preference shares out of profits is correct?

When preference shares are redeemed out of profits, a sum equal to their nominal amount must be transferred out of those profits to the Capital Redemption Reserve Account. The premium is provided separately, only fully paid shares can be redeemed, and CRR itself is not a source of redemption.

  1. AA sum equal to the nominal amount of the shares redeemed must be transferred from profits to the Capital Redemption Reserve AccountCorrect
  2. BA sum equal to the redemption premium must be transferred to the Capital Redemption Reserve Account
  3. CPartly paid shares may be redeemed if the CRR is created
  4. DShares may be redeemed out of the Capital Redemption Reserve itself

Explanation

Section 55 requires that where shares are redeemed out of profits, a sum equal to their nominal amount is transferred to CRR. The premium is provided for separately, not through CRR. Only fully paid shares may be redeemed, and permitted sources are distributable profits or a fresh issue.

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