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

Under the Companies Act, 2013, which of the following is a permitted source from which a company may redeem its redeemable preference shares?

Redeemable preference shares can be redeemed out of distributable profits or out of the proceeds of a fresh issue of shares made for redemption. The other listed items, such as securities premium for face value or unallotted application money, are not permitted sources under the Companies Act, 2013.

  1. AProceeds of a fresh issue of shares made for the purpose of redemptionCorrect
  2. BSecurities premium account used to pay the face value of shares redeemed
  3. CShare application money received on equity shares not yet allotted
  4. DCapital reserve arising from forfeiture of equity shares only

Explanation

Preference shares may be redeemed only out of profits available for dividend or out of the proceeds of a fresh issue of shares made for the purpose. Securities premium is not a source for the face value of the shares redeemed; it may only fund the premium payable on redemption. Application money not yet allotted is a liability, not a permitted source.

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