by When a company redeems its preference shares or debentures at a price higher than their face value, the excess amount paid over the nominal value is called the premium on redemption. This premium is an additional financial obligation for the company and must be properly accounted for as per the Companies Act, 2013 and relevant accounting standards.
Legal Provisions:
According to Section 52(2)(d) of the Companies Act, 2013, the premium payable on redemption of shares or debentures should be provided out of:
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Securities Premium Account, or
-
Profit & Loss Account (Free Reserves)
It cannot be provided from capital reserves or revaluation reserves.
Premium on Redemption of Preference Shares:
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If preference shares are redeemed at a premium, the company must first ensure compliance with Section 55 of the Companies Act, 2013.
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The premium payable should be transferred from the Securities Premium Account or free reserves before redemption.
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If no adequate balance exists in the Securities Premium Account, the shortfall is met from distributable profits.
Premium on Redemption of Debentures:
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The premium payable on redemption of debentures is generally specified in the terms of issue.
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At the time of issue, if the debentures are issued with a condition of redemption at premium, a Loss on Issue of Debentures Account is created and written off over the life of the debentures.
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On redemption, the premium is paid along with the principal amount.
Accounting Treatment:
The treatment varies depending on whether the premium is:
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Payable on preference shares
-
Payable on debentures
a. Premium on Redemption of Preference Shares
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Debit: Profit & Loss Account / Securities Premium Account
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Credit: Premium on Redemption of Preference Shares A/c
b. Premium on Redemption of Debentures
-
If provided at the time of issue:
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Debit: Loss on Issue of Debentures A/c
-
Credit: Premium on Redemption of Debentures A/c
-
-
At redemption:
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Debit: Premium on Redemption of Debentures A/c
-
Credit: Debenture holders A/c
-
Sources for Payment:
The payment for premium can be made from:
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Securities Premium Account (primary source)
-
Free reserves / Profit & Loss Account (secondary source)
The Companies Act ensures that premium is not paid from capital, protecting creditors’ interests.
Practical Steps for Treatment:
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Check Articles of Association: Ensure provisions allow redemption at premium.
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Ascertain Amount of Premium: Based on terms of issue.
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Identify Source: Securities Premium Account or free reserves.
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Pass Provision Entry: Transfer required amount before redemption.
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Make Redemption Payment: Pay face value + premium to shareholders or debenture holders.
Example:
Suppose a company redeems 10,000 preference shares of ₹100 each at a premium of ₹10 per share:
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Face Value: ₹10,00,000
-
Premium: ₹1,00,000
If Securities Premium A/c has ₹80,000, then: -
₹80,000 will come from Securities Premium A/c
-
₹20,000 from Profit & Loss A/c
Journal Entries Table:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 1. |
Profit & Loss A/c Dr. / Securities Premium A/c Dr. |
XXX |
|
|
To Premium on Redemption of Preference Shares A/c |
XXX |
||
| 2. |
Premium on Redemption of Preference Shares A/c Dr. |
XXX |
|
|
Preference Share Capital A/c Dr. |
XXX |
||
|
To Preference Shareholders A/c |
XXX |
||
| 3. |
Preference Shareholders A/c Dr. |
XXX |
|
|
To Bank A/c |
XXX |
||
| 4. |
Loss on Issue of Debentures A/c Dr. (if applicable) |
XXX |
|
|
To Premium on Redemption of Debentures A/c |
XXX |
||
| 5. |
Premium on Redemption of Debentures A/c Dr. |
XXX |
|
|
Debentures A/c Dr. |
XXX |
||
|
To Debenture holders A/c |
XXX |
||
| 6. |
Debenture holders A/c Dr. |
XXX |
|
|
To Bank A/c |
XXX |
