Preference share redemption is the process by which shareholders receive their preferred share capital back. A corporation can redeem its preference shares only in accordance with the terms under which they were issued or in accordance with those terms that have been modified with the consent of preference shareholders.
Preference Share Types
There are basically four main preference share types. They are preferred shares that are
* cumulative preferred share
* no cumulative preferred share
* Preferential participation share.
* movable stake.
In contrast to holders of non-cumulative preferred shares, holders of cumulative preferred shares are entitled to dividends that have not been paid in prior periods. As a result, the price of cumulative preferred shares is typically higher than the price of non-cumulative preferred shares.
When specific performance goals are met, such as when corporate profits surpass a predetermined level, preferred shares offer the benefit of increased dividends. The holder of convertible preferred shares can exchange their preferred shares for common shares at a predetermined exercise price, just like with convertible bonds.
When a company goes bankrupt, what happens?
The assets of a company that declares bankruptcy will be available to the various security holders. The order in which each security holder receives their share of the assets will be determined by the specific rights stipulated in their security agreements. Due to their superiority over common shares, preference shares, for instance, typically receive payment first. However, preference shares typically have a lower priority than corporate bonds, debentures, or other fixed-income assets.
Procedure for Redeeming Preference Shares
If profits from the company are to be used to redeem preference shares, a sum equal to the nominal value of the shares to be redeemed will be transferred from those profits to a reserve known as the Capital Redemption Reserve Account. The provisions of this Act pertaining to reducing a company’s share capital will apply as if the Capital Redemption Reserve Account were paid-up share capital increase of the company.
In terms of how shares can be redeemed, the first and most important thing to keep in mind is that only redeemable preference shares can be redeemed. Equity shares can’t be exchanged for anything.
Shares can be redeemed as follows:
* It must be authorized capital by the organization’s articles. Examine whether the Articles of Association cover the issuance of preference shares. First, it must be edited in the AOA if that is not the cast.
* Shares can only be redeemed after they have been paid in full. They can be redeemed using company profits that would otherwise be available for dividends or the proceeds of a new share issue made specifically for the purpose of redeeming shares.
* Before the shares are redeemed, any premium that is due on redemption must have been paid out of profits or the shares premium account.
* A sum equal to the nominal amount of shares redeemed will be transferred to the capital redemption reserve account from profits whenever shares are redeemed.
* Send a copy of the special resolution and an explanation on form MGT-14 to the Registrar of Companies within 30 days of the shareholders’ approval.
* The redemption of redeemable preference shares should then be made with this sum. The company’s members can receive fully paid bonus shares with this reserve.
Redeeming preference shares using company profits A sum equal to the nominal value of the shares to be redeemed will be transferred from company profits to a reserve account known as the Capital Redemption Reserve Account when the redemption of preference shares is proposed.
As if the Capital Redemption Reserve Account were the paid-up share capital of the company, the provisions of this Act pertaining to the reduction of a company’s share capital will apply. The corporation may settle outstanding shares that will be issued to company members as fully paid bonus shares using the capital redemption reserve account.
Conclusion
For a company seeking capital without compromising its control or voting rights, preference shares are the ideal financial instrument.
Read more,
- How Does Authorized Share Capital Work?
- Easy Ways to Understand the Authorized Share Capital
- Authorised Capital: Advantages & Procedure