# Redemption of Preference Shares — Sources and Conditions
## Permitted Sources of Redemption
A company can redeem preference shares only out of:
1. Profits of the company which would otherwise be available for dividend, OR
2. Proceeds of a fresh issue of shares made for the purposes of such redemption.
> Key takeaway: Capital cannot be used to redeem preference shares — only distributable profits or fresh share proceeds.
## Core Conditions
### 1. Shares Must Be Fully Paid
Only fully paid-up preference shares can be redeemed. Partly-paid preference shares cannot be redeemed.
### 2. Capital Redemption Reserve (CRR)
Where redemption is out of profits:
- A sum equal to the nominal amount of shares redeemed must be transferred to a reserve called the Capital Redemption Reserve (CRR).
- The CRR must be maintained with the same sanctity as paid-up share capital.
- CRR can be reduced only in the manner in which paid-up share capital can be reduced under the Act.
### 3. Source of Premium Payable on Redemption
| Type of Company | Source for Premium on Redemption |
|---|---|
| Prescribed class of companies whose FS comply with AS u/s 133 | Only out of profits of the company, before redemption |
| Premium on pref shares issued before commencement of the 2013 Act by such companies | Out of profits OR securities premium account |
| Any other company (not covered above) | Out of profits OR securities premium account |
## Utilisation of CRR
The CRR may be applied in paying up unissued shares of the company to be issued to members as fully paid bonus shares. This is the only permitted use.
## Memory Aid — The 3 Cs
- Cash source: Profits or fresh issue only
- CRR transfer: Equal to nominal amount when redeemed from profits
- Conversion: CRR → bonus shares only