Sources and Manner of Redemption of Preference Shares
# Sources for Redemption of Preference Shares and Premium
## Sources for Redemption of Preference Shares (PS)
Preference shares can be redeemed only out of:
1. Profits of the company available for dividend, OR
2. Proceeds of a fresh issue of shares made for the purpose of redemption (Securities Premium Account — SPA — cannot be used for redemption of share capital itself; only profits or fresh issue proceeds qualify).
## Source for Provision of Premium Payable on Redemption
The premium payable on redemption shall be provided for out of:
1. Profits of the company, OR
2. Securities Premium Account (SPA)
### Special Rule for Prescribed Class of Companies (complying with AS u/s 133)
For such prescribed companies:
SPA cannot be used to provide for premium on redemption.
Only profits of the company can be used for this purpose.
## Key Principle
The Companies Act distinguishes between redemption of the face value of preference shares (strict source: profits or fresh issue) and payment of premium on redemption (which can use SPA, except for the prescribed class).
Worked example
### Example 1
Example 1: XYZ Ltd. (not a prescribed-class company) wishes to redeem 1,00,000 preference shares of ₹100 each at a premium of ₹10. It has ₹50 lakhs in SPA and ₹2 crore in free reserves.
Face value redemption (₹1 crore): must come from profits OR fresh issue → use ₹1 crore of profits.
Premium (₹10 lakhs): can be provided from SPA → use SPA.
### Example 2
Example 2: ABC Ltd. is a prescribed-class company complying with AS u/s 133. It wishes to redeem preference shares at a premium.
Face value: from profits or fresh issue.
Premium: cannot use SPA — must use profits only.
⚠️ Common exam mistakes
Believing SPA can be used to redeem the face value of preference shares — it cannot; SPA can only fund the premium portion.
Forgetting that for prescribed-class companies complying with AS u/s 133, even the premium cannot be charged to SPA.
Confusing 'fresh issue of shares' source with any fresh issue — the fresh issue must specifically be 'for the purposes of redemption'.
Bare-Act text Section 55(2) · Companies Act, 2013 · click to expand
The premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed. Provided that in case of such class of companies as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed.