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Prof. M. C. Sharma 1
Redemption of
Preference Shares and
Bonus Issue
M. C. Sharma
Associate Professor
Department of Commer...
Prof. M. C. Sharma 2
Meaning of Preference Shares
Preference shares are those shares which have the two
preferential right...
Prof. M. C. Sharma 3
Types of Preference Shares
• Cumulative Preference Shares
– If dividend is not paid on such shares, t...
Prof. M. C. Sharma 4
Types of Preference Shares (Contd.)
• Participative Preference Shares
– In addition to basic preferen...
Prof. M. C. Sharma 5
Types of Preference Shares (Contd.)
• Non-Participative Preference Shares
– Such preference shares ha...
Prof. M. C. Sharma 6
Types of Preference Shares (Contd.)
• Convertible Preference Shares
A convertible preference share ge...
Prof. M. C. Sharma 7
Types of Preference Shares (Contd.)
• Redeemable Preference Shares
On such preference shares, the amo...
Prof. M. C. Sharma 8
Redemption of Preference
Shares – Important Provisions
• Redemption of preference shares means repaym...
Prof. M. C. Sharma 9
Redemption of Preference
Shares – Important Provisions
• The preference shares must be redeemed withi...
Prof. M. C. Sharma 10
Conditions of Redemption [Sec. 55]
1. Such shares must be fully paid.
• Partly paid preference share...
Prof. M. C. Sharma 11
Conditions of Redemption [Sec. 55]
2. Such shares can be redeemed out of distributable
profits or ou...
Prof. M. C. Sharma 12
• Examples Distributable or divisible profits:
– Surplus in the Profit and Loss A/c
– General Reserv...
Prof. M. C. Sharma 13
• Non-distributable profits:
Profits which can not be distributed as dividend.
(Transfer to CRR is n...
Prof. M. C. Sharma 14
3. Any premium payable on redemption of such shares shall be
provided from out of the security premi...
Prof. M. C. Sharma 15
Calculation of Capital Redemption Reserve
(CRR) and Net Proceeds from Fresh Issue
• CRR required
= N...
Illustration 1:
Calculate net proceeds from fresh issue:
1. Issued 1,50,000 shares of Rs. 10 each at par
2. Issued 1,50,00...
Illustration 1:
Calculate net proceeds from fresh issue:
Answer:
(1)15,00,000;
(2)15,00,000;
(3)12,00,000;
(4)10,50,000.
P...
Illustration 2
Calculate the amount of CRR required in the following cases:
Preference Shares to Be
redeemed
Fresh issue o...
Journal Entries
1. If redeemable preference shares are not fully
paid, then to make them fully paid, a final call
should b...
Journal Entries
2. If there is calls-in-arrear on some shares:
• EITHER such amount shall be received,
• OR such shares sh...
Journal Entries (Contd.)
Prof. M. C. Sharma 21
3. For sale of assets/investments to arrange cash for
redemption
Bank A/c
T...
Journal Entries (Contd.)
Prof. M. C. Sharma 22
4. For issue of debentures, if any
Bank A/c
To Debentures Application A/c
D...
Journal Entries (Contd.)
Prof. M. C. Sharma 23
5. For issue of new shares, if any
Bank A/c
To Share Application & Allotmen...
Journal Entries (Contd.)
Prof. M. C. Sharma 24
7. For writing off Premium on Redemption, if any
Securities Premium A/c
Cap...
Journal Entries (Contd.)
Prof. M. C. Sharma 25
8. For arrangement of bank loan or bank overdraft, if required
Bank A/c
To ...
Redemption of Preference Shares by
Conversion
• Preference shares may be redeemed by
conversion into equity shares. Such p...
Journal Entries for Redemption by Conversion
Prof. M. C. Sharma 27
1. For making due redemption
Pref. Share Capital A/c
*P...
Journal Entries for Redemption by Conversion
Prof. M. C. Sharma 28
2. For issue of equity shares at par
Preference Shareho...
Issue of Bonus Shares
• Capital Redemption Reserve (CRR) and
Securities Premium can be used for issue of
fully paid bonus ...
Journal Entries for Issue of Bonus Shares (Contd.)
Prof. M. C. Sharma 30
3. When Bonus to shareholders is declared
Capital...
Journal Entries for Issue of Bonus Shares
Prof. M. C. Sharma 31
3. When Bonus to shareholders is used to make existing par...
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Redemption of preference shares and bonus issue

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Meaning and Types of Preference Shares, Redemption of Preference Shares, Issue of Bonus Shares

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Redemption of preference shares and bonus issue

  1. 1. Prof. M. C. Sharma 1 Redemption of Preference Shares and Bonus Issue M. C. Sharma Associate Professor Department of Commerce Shaheed Bhagat Singh Evening College (University of Delhi), Delhi, INDIA
  2. 2. Prof. M. C. Sharma 2 Meaning of Preference Shares Preference shares are those shares which have the two preferential rights: (1)A right to receive dividend at a given rate before any dividend is paid on equity shares; subject to declaration by the company. Rate of dividend is mentioned on the face of the share certificate. For example – 12% Preference Shares. Here, 12% is rate of dividend. (1)A right to repayment of capital before equity shareholders at the time of liquidation of the company.
  3. 3. Prof. M. C. Sharma 3 Types of Preference Shares • Cumulative Preference Shares – If dividend is not paid on such shares, the arears of dividend are carried forward and are paid in subsequent years. – All preference shares are cumulative unless clearly stated to be non-cumulative. • Non-cumulative Preference Shares – Dividend is paid out of the each year’s profits. – If dividend is not paid on such shares, the right to dividend lapses. – It is not carried as arrears.
  4. 4. Prof. M. C. Sharma 4 Types of Preference Shares (Contd.) • Participative Preference Shares – In addition to basic preferential rights, such shares also carries (a) the right to participate in surplus profits left after payment of preference and equity dividend, and (b) in the event of winding up, the right to participate in the surplus assets left after repayment of preference and equity capital.
  5. 5. Prof. M. C. Sharma 5 Types of Preference Shares (Contd.) • Non-Participative Preference Shares – Such preference shares have only basic preferential rights and no additional rights to participate in surplus profits and surplus assets.
  6. 6. Prof. M. C. Sharma 6 Types of Preference Shares (Contd.) • Convertible Preference Shares A convertible preference share gets the right of conversion into equity share. • Non-convertible Preference Shares –A non-convertible preference share does not have the right of conversion into equity share. –All preference shares are non-convertible unless clearly stated to be convertible.
  7. 7. Prof. M. C. Sharma 7 Types of Preference Shares (Contd.) • Redeemable Preference Shares On such preference shares, the amount is refunded in accordance with Sec. 55 of the Companies Act 2013. • Irredeemable Preference Shares Irredeemable preference shares can not be redeemed during the life of the company. A company limited by shares cannot issue irredeemable preference shares in India.
  8. 8. Prof. M. C. Sharma 8 Redemption of Preference Shares – Important Provisions • Redemption of preference shares means repayment of preference share capital to preference shareholders. • The Companies Act 2013 allows the issue of redeemable preference shares if articles of association of the company so authorise or permit. • No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable.
  9. 9. Prof. M. C. Sharma 9 Redemption of Preference Shares – Important Provisions • The preference shares must be redeemed within a period 20 years from the date of issue of such shares. [Sec. 80(5A)]. To finance infrastructure projects, a company can issue preference shares for exceeding 20 years but not more than 30 years. • According to rule 10 of the Companies (Shares and Debentures) Rules 2014, the tenure of such preference shares cannot exceed 30 years and the company shall redeem every year at least 10% of such preference shares.
  10. 10. Prof. M. C. Sharma 10 Conditions of Redemption [Sec. 55] 1. Such shares must be fully paid. • Partly paid preference shares must be made fully paid before redemption by making final call due and received. • In case of calls in arrear, such shares can not be redeemed till they are made fully paid.
  11. 11. Prof. M. C. Sharma 11 Conditions of Redemption [Sec. 55] 2. Such shares can be redeemed out of distributable profits or out of the proceeds of a fresh issue of shares made for the purpose of redemption. Distributable or divisible profits: Profits which can be distributed as dividend.(Capital Redemption Reserve can be created by transfer from divisible profits only)
  12. 12. Prof. M. C. Sharma 12 • Examples Distributable or divisible profits: – Surplus in the Profit and Loss A/c – General Reserve or Reserve Fund – Dividend Equalisation Reserve. – Insurance Fund or Reserve, Workmen Compensation Fund, Contingency Reserve, Provision for doubtful debts, Provision for Taxation (Only in excess of the required provision or a liability against such Reserve or Fund can be used to create CRR.)
  13. 13. Prof. M. C. Sharma 13 • Non-distributable profits: Profits which can not be distributed as dividend. (Transfer to CRR is not allowed from these accounts) • Examples: –Securities Premium A/c –Capital Reserve –Pre-incorporation Profits –Share Forfeited A/c –Revaluation Reserve –Profit on sale of Fixed Assets/Investments –Debenture Redemption Reserve (DRR) –Investment Allowance Reserve –Development Rebate Reserve (Dev. RR) (Investment Allowance Reserve and Dev. RR are available for CRR, only when specified in the question)
  14. 14. Prof. M. C. Sharma 14 3. Any premium payable on redemption of such shares shall be provided from out of the security premium account or out of the profits. 4. When preference shares are redeemed out of the profits, an amount equal to the face value of such shares redeemed shall be transferred from the distributable profits to Capital Redemption Reserve (CRR) Account. 5. The amount credited to CRR may be used by the company only by way of issue of fully paid bonus shares. Conditions of Redemption (Contd.)
  15. 15. Prof. M. C. Sharma 15 Calculation of Capital Redemption Reserve (CRR) and Net Proceeds from Fresh Issue • CRR required = Nominal Value of Preference Shares to be redeemed – Net Proceeds from Fresh Issue of Shares • Net Proceeds from Fresh Issue of Shares = Nominal Value of Shares issued (Premium on such issue, if any, is to be ignored) If new shares issued are partly paid, then only the paid up nominal amount should be considered. • Fresh Shares to be issued = Nominal Value of Preference Shares to be redeemed – Profits available for CRR.
  16. 16. Illustration 1: Calculate net proceeds from fresh issue: 1. Issued 1,50,000 shares of Rs. 10 each at par 2. Issued 1,50,000 shares of Rs. 10 each at a premium of Rs. 2 per share 3. Issued 1,50,000 shares of Rs. 10 each at par, only Rs. 8 called and paid. 4. Issued 1,50,000 shares of Rs. 10 each at a premium of Rs. 2 per share. Only Rs. 9 including premium is called and paid. Prof. M. C. Sharma 16
  17. 17. Illustration 1: Calculate net proceeds from fresh issue: Answer: (1)15,00,000; (2)15,00,000; (3)12,00,000; (4)10,50,000. Prof. M. C. Sharma 17
  18. 18. Illustration 2 Calculate the amount of CRR required in the following cases: Preference Shares to Be redeemed Fresh issue of share capital 1. Rs. 12,00,000 at par Rs. 10,00,000 at par 2. Rs. 15,00,000 at a premium of 5% Rs. 10,00,000 at par 3. Rs. 12,00,000 at par Rs. 9,00,000 at premium of 10% Answer: 1. Rs. 2,00,000 2. Rs. 5,00,000 3. Rs. 3,00,000 Prof. M. C. Sharma 18
  19. 19. Journal Entries 1. If redeemable preference shares are not fully paid, then to make them fully paid, a final call should be made and received: Prof. M. C. Sharma 19 (a) Pref. Share Final Call A/c To Pref. Share Capital A/c Dr. (b) Bank A/c To Pref. Share Final Call A/c Dr.
  20. 20. Journal Entries 2. If there is calls-in-arrear on some shares: • EITHER such amount shall be received, • OR such shares shall be forfeited and then re-issued before redemption. • Entries shall be passed accordingly. Prof. M. C. Sharma 20
  21. 21. Journal Entries (Contd.) Prof. M. C. Sharma 21 3. For sale of assets/investments to arrange cash for redemption Bank A/c To Assets or Investment A/c Dr. * Any loss on sale of assets/investments shall be debited to Surplus (Profit and Loss A/c). * Any Profit on sale of assets/investments shall be credited to Capital Reserve.
  22. 22. Journal Entries (Contd.) Prof. M. C. Sharma 22 4. For issue of debentures, if any Bank A/c To Debentures Application A/c Dr. Debentures Application A/c To Debentures A/c Dr.
  23. 23. Journal Entries (Contd.) Prof. M. C. Sharma 23 5. For issue of new shares, if any Bank A/c To Share Application & Allotment A/c Dr. Share Application & Allotment A/c To Share Capital A/c To Securities Premium A/c (if any) Dr. 6. For making due redemption Redeemable Pref. Share Capital A/c *Premium on Redemption on of Pref. Shares A/c To Preference Shareholders A/c * If preference shares are redeemed at premium. Dr. Dr.
  24. 24. Journal Entries (Contd.) Prof. M. C. Sharma 24 7. For writing off Premium on Redemption, if any Securities Premium A/c Capital Reserve A/c* General Reserve A/c Surplus A/c To Premium on Redemption of Pref. Shares A/c Dr. Dr. Dr. Dr. * * Above order or preference is not legally required. It is desirable that minimum use of free reserve or divisible profits is made for this purpose. Capital reserve (profit) can be used only if it was realised in cash.
  25. 25. Journal Entries (Contd.) Prof. M. C. Sharma 25 8. For arrangement of bank loan or bank overdraft, if required Bank A/c To Bank Loan or Bank Overdraft A/c Dr. 9. For payment to Preference Shareholders Preference Shareholders A/c To Bank A/c Dr.
  26. 26. Redemption of Preference Shares by Conversion • Preference shares may be redeemed by conversion into equity shares. Such preference shares are Convertible Preference Shares. • When Preference shares are redeemed by conversion, there is no need to create Capital Redemption Reserve. Prof. M. C. Sharma 26
  27. 27. Journal Entries for Redemption by Conversion Prof. M. C. Sharma 27 1. For making due redemption Pref. Share Capital A/c *Prem. On Redemption of Pref. Shares A/c To Preference Shareholders A/c * If preference shares are redeemed at premium. Dr.
  28. 28. Journal Entries for Redemption by Conversion Prof. M. C. Sharma 28 2. For issue of equity shares at par Preference Shareholders A/c To Equity Share Capital A/c Dr. 3. For issue of equity shares at premium Preference Shareholders A/c To Equity Share Capital A/c To Securities Premium A/c Dr.
  29. 29. Issue of Bonus Shares • Capital Redemption Reserve (CRR) and Securities Premium can be used for issue of fully paid bonus shares. • Free reserves and surplus can be used to pay bonus to shareholders either to issue fully paid bonus shares or to make existing partly paid shares as fully paid up. Prof. M. C. Sharma 29
  30. 30. Journal Entries for Issue of Bonus Shares (Contd.) Prof. M. C. Sharma 30 3. When Bonus to shareholders is declared Capital Redemption Reserve A/c Securities Premium A/c General Reserve A/c Surplus OR Divisible Profits A/c To Bonus to Shareholders A/c Dr. Dr. Dr. Dr. 2. For issue of fully paid bonus shares Bonus to Shareholders A/c To Equity Share Capital A/c Dr.
  31. 31. Journal Entries for Issue of Bonus Shares Prof. M. C. Sharma 31 3. When Bonus to shareholders is used to make existing partly paid shares as fully paid up: (a) For making final call due Equity Share Final Call A/c To Equity Share Capital A/c Dr. (b) For adjusting bonus to shareholders against final call due: Bonus to Shareholders A/c To Equity Share Final Call A/c Dr.
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Meaning and Types of Preference Shares, Redemption of Preference Shares, Issue of Bonus Shares

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