Issue and Redemption of Preference Shares

9th March 2020 4 By indiafreenotes

If company liquefies, the owners of preference shares will be the first one to get their money back after the company has paid its debt.  Preference shares also have a right to participate in excess profits left after paying the equity shareholders.

They also have a right to participate in the premium at the time of redemption. These shares do not carry voting rights.

There are different kinds of preference shares such as cumulative and noncumulative preference shares, redeemable and non-redeemable preference shares, convertible and non-convertible preference shares, participating and non-participating preference shares.

A company may issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue under section 55 of the Companies Act 2013.

The company should be authorized by its articles. A company limited by shares shall, can not issue any preference shares which are irredeemable.

For infrastructure projects, A company may issue preference shares for a period exceeding 20 years but not exceeding 30 years (Specified in Schedule VI).

However, subject to redemption of a minimum 10% of such preference shares per year from the twenty-first year onwards or earlier, on a proportionate basis, at the option of the preference shareholders.

Redemption of preference shares

When preference shares are fully paid up, they can be redeemed:

  • out of the profits of the company which would be available for dividend or
  • out of the proceeds of a fresh issue of shares which are issued for the purposes of such redemption

Journal Entries

Date

Particulars  

Amount(Dr.)

Amount(Cr.)

(i) For receipt of application money Bank Dr.
To Preference Share Application A/c
(Being the application money received
(ii) For allotment of shares Preference Share Application A/c Dr.
To  Preference Share Capital A/c
(Being transfer of the application money to share capital account)
 (iii) For making the allotment money (second installment) due Preference Share Allotment A/c Dr.
To  Preference Share Capital A/c
(Being the allotment money due)
(iv) For receipt of allotment money  Bank Dr.
To  Preference Share Allotment A/c
(Being receipt of allotment amount)
(v) For making the first call Preference Share First Call A/c Dr.
To Preference Share Capital A/c
(Being the amount due on the first call)
(vi) For receipt of first call money Bank Dr.
To  Preference Share First Call A/c
(Being receipt of first call amount)
(vii) For the second call is made Preference Share Second Call A/c Dr.
To  Preference Share Capital A/c
(Being the amount due on the second call)
(viii) For receipt of second call money Bank Dr.
  To  Preference Share Second Call A/c
  (Being receipt of the amount of the second call)
(ix) For the final call is made Preference Share Final Call A/c Dr.
  Preference Share Final Call A/c
  (Being the amount due on final call)
(x) For receipt of final call money Bank Dr.
  To  Preference Share Final Call A/c
  (Being receipt of the final call amount)