Fresh issue of Shares for the Purpose of Redemption

When a company redeems its preference shares, it is essentially repaying the capital invested by the shareholders. The Companies Act, 2013 in India requires that a company must ensure its capital base is maintained after redemption. One of the recognized methods to comply with this requirement is to issue fresh shares specifically for the purpose of redemption. This process is not just a formality — it safeguards the company’s financial stability, protects creditors, and maintains statutory capital adequacy.

Legal Requirement:

As per Section 55 of the Companies Act, 2013, a company cannot redeem preference shares unless:

1. They are fully paid-up.

2. Redemption is funded either out of:

   • Profits available for distribution as dividends (requiring transfer of an equal amount to the Capital Redemption Reserve), or

   • Proceeds of a fresh issue of shares.

If the company opts for the second method, it can issue new shares — equity or preference — and use the amount raised to pay preference shareholders on redemption.

Objectives of Fresh Issue for Redemption:

1. Maintain Capital Structure: Redemption reduces share capital; fresh issue replenishes it.

2. Ensure Liquidity: Provides the necessary funds for payment to preference shareholders without straining working capital.

3. Legal Compliance: Fulfills Companies Act requirements for redemption.

4. Avoid Reduction of Shareholders’ Funds: Protects creditor interests.

5. Sustain Creditworthiness: Maintains financial ratios and market perception.

Procedure for Fresh Issue of Shares for Redemption:

1. Board Meeting: The Board passes a resolution approving the issue and the redemption plan.

2. Compliance Check: Ensure preference shares to be redeemed are fully paid-up.

3. Determine the Amount to be Raised: Based on the nominal value of preference shares to be redeemed.

4. Offer of Fresh Shares: Follow procedures for public issue, rights issue, or private placement as per the Act.

5. Collection of Application Money: Receive proceeds from new shareholders.

6. Utilization for Redemption: Apply the amount exclusively for paying off the preference shareholders.

7. Filing with ROC: Submit necessary forms such as SH-7 and others within the prescribed period.

Accounting Treatment:

When fresh shares are issued for redemption, the accounting process involves:

1. Receipt of Money from Fresh Issue:

Bank A/c Dr.
To Share Capital A/c
(Being fresh issue of shares for the purpose of redemption)

2. Redemption Payment:

Preference Share Capital A/c Dr.
Premium on Redemption A/c Dr. (if any)
To Preference Shareholders A/c
(Being amount payable to preference shareholders on redemption)

3. Payment to Shareholders:

Preference Shareholders A/c Dr.
To Bank A/c
(Being payment made to preference shareholders)

If redemption is at a premium, the premium amount is adjusted from the Securities Premium A/c or the Profit & Loss A/c.

Advantages of Fresh Issue for Redemption:

1. No Strain on Profits: The company does not need to divert distributable profits; the cash comes from new investors.

2. No Need for CRR Creation from Profits: Since the redemption is funded by fresh proceeds, the Capital Redemption Reserve requirement from profits may not arise.

3. Boosts Shareholder Base: Brings in new shareholders and diversifies ownership.

4. Maintains Liquidity: Working capital remains intact for operations.

5. Positive Market Signal: Shows company’s ability to attract fresh investment.

Example:

Scenario:

A company has 10,000 preference shares of ₹100 each, fully paid-up, to be redeemed at par. The company decides to issue 10,000 equity shares of ₹100 each at par for this purpose.

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