Redemption of preference share

PREFERENCE SHARE
 Preference shares represent partial ownership in a company.
 Preference Shares will carry preferential (cumulative) right to
dividend, at coupon rate, when declared.
 The dividend will be calculated pro rata i.e. from the date of
allotment of such Preference Shares.
 Preference shareholders always receive their dividends first.
 Preference shareholders do not enjoy any of the voting rights.
 Preference shareholders have a greater claim on the
company's assets than common stockholders.
 The Preference Shares will have the maximum redemption
period of 20 years.
A Presentation By Himanshu
Arya, Daksh
2/12/2012 1
Professional Education Meerut

REDEMPTION OF PREFERENCE SHARE
 Only fully paid up Preference Shares will be redeemed.
 The redemption of Preference Shares will not be taken as reducing
the Authorised Share Capital of the Company.
 The Preference Shares will be redeemed at par/ at a premium.
 If the Preference Shares are redeemed at a premium, premium will
be provided either out of Securities Premium Account or Profit and
Loss Account.
 Where any Preference Shares are redeemed out of profits for
dividend, which a sum equivalent to the nominal value of the
Preference Shares redeemed will be transferred to the “Capital
Redemption Reserve A/C”.
 Where any Preference Shares are redeemed by issuing of new
shares, it must be redeemed within 1 month from the date of issue
of new shares & it will not be considered as increase of Authorised
Share Capital.
Arya, Daksh
2/12/2012 2

Capital Redemption Reserve (CRR) A/C
 Creates when a company redeem or buy-back its own
shares which reduces share capital.
 It creates with the same with nominal value of the shares
are redeemed out of profits.
 Due to its creation the share capital is not reduced after
redemption, - CRR A/C is converted to Share Capital.
 Capital before Redemption = Capital after Redemption + CRR A/C.
 Is not distributed among the shareholders.
 Used only for Issue of Fully Paid Up Shares.
 Used in paying up unissued shares to be issued to the
members as Fully Paid Bonus Shares.
 Redemption out of available Profit.
 Redemption partly out of available Profit & partly by
issuing new Shares.
Arya, Daksh
2/12/2012 3

Capital Redemption Reserve (CRR) A/C
 Amount to be transferred to CRR A/C:-
 In case of Redemption out of Profits:
Face Value of Preference Shares to be redeemed
 In case of Redemption out of Profits & partly
by issuing New Shares:
Face Value of Preference Shares to be redeemed
LESS Face Value of New Shares
LESS Discount Allowed on Issue of New Shares

Arya, Daksh
2/12/2012 4

Methods Are:
 Alternative-1 Redemption out of available Profit
for Dividend
 Alternative-2 Redemption by issuing new Equity
or Preference Shares
 Alternative-3 Redemption partly out of available
Profit & partly by issuing new Shares
 Important Note A Company has no right to sales
its Assets or issues debentures to redeem its
Preference Shares.

Arya, Daksh
2/12/2012 5

 Profits available for Dividend U/S 205
 Profit & Loss A/C
 General Reserve
 Reserve Fund
 Contingency Reserve
 Insurance Fund
 Dividend Equalisation Fund
 Debenture Redemption Fund
 Voluntary Debenture Sinking Fund
 Workmen’s Accident Fund
 Workmen’s Compensation Fund

Arya, Daksh
2/12/2012 6

AT PAR
Issuing 20,000 8% RPS @ RS. 100 at PAR
For This Obligation Co. has:
CR Balance of P&L A/C : 5,00,000
General Reserve : 3,00,000
Workmen’s Accident Fund : Sufficient Fund
Capital Reserve : 8,00,000
Security Premium A/C : 1,00,000
For This Obligation Co. Issues:
1,00,000 Equity Shares @ RS. 10 at 10% Premium
Arya, Daksh
2/12/2012 7

Co. has:
Workmen’s Accident Fund : 2,00,000
{20 Lack – ( 5 Lack – 3 Lack – 10 Lack)}
Security Premium A/C : 1,00,000
Funds are out of profits for Dividend will be transferred to CRR A/C

P&L Appropriation A/C Dr. 5,00,000
General Reserve Dr. 3,00,000
Workmen’s Accident Fund Dr. 2,00,000
To Capital Redemption Reserve A/C 10,00,000

Arya, Daksh
2/12/2012 8

Co. issues:

Bank A/C Dr. 11,00,000
To Equity Share Capital A/C 10,00,000
To Securities Premium A/C 1,00,000

 Securities Premium A/C cannot be transferred to CRR A/C.
 Securities Premium A/C can be written off from the amount of
paying premium on redemption of Preference Shares.

Arya, Daksh
2/12/2012 9

Co. issues:
Issuing 20,000 8% RPS @ RS. 100 at PAR

Due Amount to 8% RPS Shareholders

8% Redeemable Preference Share Capital A/C Dr. 20,00,000
To Preference Shareholders A/C 20,00,000

Payment to 8% RPS Shareholders

Preference Shareholders A/C Dr. 20,00,000
To Bank A/C 20,00,000
Arya, Daksh
2/12/2012 10

AT PREMIUM
Issuing 20,000 8% RPS @ RS. 100 at 10% Premium
Share Forfeiture A/C : 1,00,000
4,000 9% Preference Shares @ RS. 100 at 20% Premium

Arya, Daksh
2/12/2012 11

Co. has:
Funds are out of profits for Dividend will be transferred to CRR A/C

General Reserve Dr. 2,00,000

Arya, Daksh
2/12/2012 12

Co. issues:
4,000 9% Preference Share @ RS. 100 at 20% Premium

Bank A/C Dr. 11,00,000
To 9% Pref Share Capital A/C 4,00,000
To Securities Premium A/C 1,80,000

 Securities Premium A/C can be provided for the amount of
paying premium on redemption of Preference Shares.
Arya, Daksh
2/12/2012 13

Premium on Preference Share Redemption
will be provided out of “Securities Premium
A/c” and/or “Profit & Loss A/c”

Securities Premium A/c Dr. 1,80,000
Profit & Loss A/C Dr. 20,000
To Premium on Preference Share Redemption A/C 2,00,000

Arya, Daksh
2/12/2012 14

Co. issues:

 Due Amount to 8% RPS Shareholders

Premium on Preference Share Redemption A/C Dr. 2,00,000

 Payment to 8% RPS Shareholders
To Bank A/C 22,00,000

Arya, Daksh
2/12/2012 15

AT PREMIUM

Arya, Daksh
2/12/2012 16

AT PREMIUM
CR Balance of P&L A/C : Sufficient Balance
50,000 Equity Shares @ RS. 10 at 10% Discount
10,000 12% Debenture @ RS. 10 at Par
For This Obligation Co. Sales:
Investment costing 1,25,000 at 1,18,000

Arya, Daksh
2/12/2012 17

Co. issues:
50,000 Equity Shares @ RS. 10 at 10% Discount
10,000 12% Debenture @ RS. 10 at Par

Bank A/C Dr. 11,50,000
Discount on Issue of Shares Dr. 50,000
To 9% Pref Share Capital A/C 5,00,000
To 12% Debentures A/C 1,00,000
To Securities Premium A/C 50,000

 Securities Premium A/C can be provided for the amount of paying
premium on redemption of Preference Shares.

Arya, Daksh
2/12/2012 18

Co. sales:
Investment Costing 1,25,000 at 1,18,000

Bank A/C Dr. 1,18,000
Loss on Sales of Investment Dr. 7,000
To Investment A/C 1,25,000
 This Loss or Profit on sales of Assets is transferred to P&L A/C.
Profit & Loss A/C Dr. 7,000
To Loss on Sales of Investment 7,000
Arya, Daksh
2/12/2012 19

Premium on Preference Share Redemption
will be provided out of “Securities Premium
A/c” and/or “Profit & Loss A/c”

Securities Premium A/c Dr. 50,000
Profit & Loss A/C Dr. 1,00,000
To Premium on Preference Share Redemption A/C 1,50,000

Arya, Daksh
2/12/2012 20

 Funds are out of profits for Dividend will be transferred
to CRR A/C


Payment to be made 15,00,000
LESS Funds from Issuing Equity Shares 4,50,000
LESS Funds from Issuing 9% Pref Shares 5,00,000 9,50,000
5,50,000

Arya, Daksh
2/12/2012 21

Co. issues:

 Due Amount to 10% RPS Shareholders

Premium on Preference Share Redemption A/C Dr. 1,50,000

 Payment to 10% RPS Shareholders
To Bank A/C 16,50,000

Arya, Daksh
2/12/2012 22

Calculate the Face Value of Shares to be issued
For the obligation of Redemption.
Suppose the face value of shares to be issued = x
Face Value of Pref Shares to be redeemed
ADD Premium on redemption
=
Existing premium in the balance sheet
ADD Profits available for dividend
ADD x
ADD Premium on new issue (x * Premium Rate) OR
LESS Discount on new issue (x * Discount Rate)
Arya, Daksh
2/12/2012 23

BONUS SHARES
 Shares without Cost for which nothing is paid by
shareholders.
 Issued to only Existing Shareholders.
 Issued in a ratio of the shares an investor hold.
 Usually announced by the company with a record date.
 Usually gives bonus shares as a substitute of dividend
payouts.
 The face value of the share doesn’t get change after
bonus.
 Bonus shares increases the number of shares in the
market which goes down EPS.
Arya, Daksh
2/12/2012 24

WHY BONUS SHARES
 Company has more accumulated more reserve.
 Accumulated Reserve > Normally Necessity.
 Company shares this Excess Reserve with their Existing
Shareholders in the form of Bonus Shares.
 Company is not in position to pay Cash Bonus or
Dividend due to Insufficient Cash.
 Cash Bonus affects the Working Capital & future plans
of Capatilisation.
 Issued Capital is Increased.
 Assets remain Intact.
 Liquidity of the company is not affected.
Arya, Daksh
2/12/2012 25

CAPITALIZATION OF PROFIT
Conversion of Retained Earnings into Paid-Up
Capital.
Profits or Reserves become the part of Issued
Capital.
By issuing bonus shares to current shareholders
in proportion to their shareholdings.
By Making Partly Paid Shares as Fully Paid
without getting Cash from the shareholders.
By issuing a stock dividend.
Arya, Daksh
2/12/2012 26

METHODS OF ISSUING BONUS SHARES
Aletrnative-1
 Capitalisation of Profit by Issuing Bonus Shares
 Issuing of FREE Fully Paid Shares as Bonus Shares.
Alternative-2
 Capitalisation of Profit by Without Issuing Bonus
Shares
 Making Partly Paid Shares as Fully Paid without
getting Cash from the shareholders.
Arya, Daksh
2/12/2012 27

BUY-BACK
Section 77A Provides the provisions of Buy-Back.
A company buy its own shares.
Shares can buy-back from:-
 Open Market through Book Building Process &
Stock Exchanges.
 Existing Equity Shareholders on a Pro-Rata basis.
 Odd Lot Shareholders where the lot of securities of a public
company, whose shares are listed on a recognized stock
exchange, is smaller than such marketable lot, as may be
specified by the stock exchange.
 Employees of the company pursuant to a scheme of Stock
Option or Sweat Equity.
Arya, Daksh
2/12/2012 28

ACCOUNTING TREATEMENT OF BONUS
SHARES
 Declaration of bonus from Profits and Reserves of LAST
YEAR
On Declaration of Bonus Shares:-

Capital Redemption Reserve A/C Dr.
Capital Reserve A/C Dr.
Securities Premium A/C Dr.
General Reserve A/C Dr.
P&L Appropriation A/C Dr.
To Bonus to Shareholders A/C

Arya, Daksh
2/12/2012 29

ACCOUNTING TREATEMENT OF BONUS
SHARES
 Declaration of bonus from Profits and Reserves of LAST YEAR

On Issue of Bonus Shares at PAR :-
Bonus to Shareholders A/C Dr.
To Equity Share Capital A/C
On Issue of Bonus Shares at PREMIUM :-
Bonus to Shareholders A/C Dr.
To Equity Share Capital A/C
To Securities Premium A/C

Arya, Daksh
2/12/2012 30

WHY BUY-BACK
To increase promoters holding.
To Increase earning per share.
To Support share value.
To pay surplus cash not required by business.
To Thwart takeover bid.
To Rationalise the capital structure by writing off.
capital not represented by available assets.

Arya, Daksh
2/12/2012 31

RESOURCES OF BUY-BACK
Free reserves- A sum equal to the nominal
value of the buy-back shares shall be
transferred to the CRR A/C.
 Securities Premium Account
Proceeds of any shares or securities –
A Company cannot buy-back its shares or
securities out of the proceeds of an earlier
issue of the same kind of shares or securities.
Arya, Daksh
2/12/2012 32

CONDITIONS FOR BUY-BACK
 Should be Authorized by the Articles of Association of
the Company.
 The Special Resolution is to be passed in the General
Meeting of shareholders.
 Less Than 25% of the Total Paid-UP Capital & Free
Reserves of the company.
 DEBT-Equity Ratio should not more than 2:1 after such
buy-back.
 All the shares for buy-back should be Fully Paid-Up.
 Should be completed within 12 months from the date
of passing the Special Resolution.

Arya, Daksh
2/12/2012 33

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