Question

Which of the following is not a source of redemption of preference shares?

• A. Divisible profit.
• B. Securities premium account.
• C. Realization of asset.
• D. Proceeds of fresh issue.

Answer 1

The correct option is C Realization of asset.

Redemption of preference share capital means the refund of amount of share capital to the preference shareholders either on fixed date or after a certain period.

Section 100 of companies act prohibit the companies to refund the share capital to its shareholders if it not approved by the court. But the section 80 of companies act permits the company to issue redeemable preference shares if it is authorized by its articles.

There are certain guidelines for redemption of preference share capital:

1) Company must be authorized by its article

2) Only fully paid up shares can be redeemed.

3) These shares can be redeemed out of the divisible profits, share premium account or by issue of fresh share capital.

4) If shares are redeemed out of profits, than an equal amount of the nominal value of shares need to be transferred to capital redemption reserve account.

5) Redemption can not be done from realization of assets.