Think of preference shares like a fixed deposit with a company — investors get priority on dividends and repayment, but the company must have a plan to pay them back. Section 55 is all about the rules for issuing and redeeming those shares. This section is asked frequently as a 4-mark or 8-mark question in CA Inter exams, especially the Capital Redemption Reserve (CRR) mechanics.
Here's the core rule: no company limited by shares can issue irredeemable preference shares after the Companies Act 2013 commenced. Every preference share must have an expiry date. That maximum life is 20 years from the date of issue — except for infrastructure projects (listed in Schedule VI), where the period can exceed 20 years, provided a prescribed percentage is redeemed annually at the shareholder's option.
Now, when a company actually redeems these shares, three non-negotiable conditions kick in. First, shares must be fully paid-up before redemption — you can't redeem partly-paid shares. Second, redemption money can only come from two sources: profits available for dividend, or the proceeds of a fresh issue of shares made specifically for redemption. Third — and this is the exam favourite — when redeeming out of profits, the company must transfer an amount equal to the nominal value of shares redeemed into the Capital Redemption Reserve (CRR) Account. The CRR is then treated like paid-up share capital (so it can't be distributed as dividend). The good news: CRR can be used to issue fully paid bonus shares to existing members.
What if a company simply can't redeem? Sub-section (3) provides an escape hatch: with three-fourths in value of shareholders' consent and Tribunal approval, the company can issue fresh redeemable preference shares equal to the amount due (including arrear dividends) to swap out the old ones. Shareholders who don't consent get paid off immediately — the Tribunal will order that.
📊 Worked example
Example 1 — Redemption out of Profits (CRR Calculation)
Rajesh & Co. Pvt. Ltd. redeems 10,000 preference shares of ₹100 each (fully paid) at a premium of ₹20 per share, entirely out of profits.
| Item | Amount |
|---|---|
| Nominal value of shares redeemed (10,000 × ₹100) | ₹10,00,000 |
| Premium on redemption (10,000 × ₹20) | ₹2,00,000 |
| Total cash outflow | ₹12,00,000 |
Working:
- Transfer to Capital Redemption Reserve = Nominal value = ₹10,00,000 (mandatory)
- Premium of ₹2,00,000 is charged to Profit & Loss Account (or Securities Premium, subject to company class)
- CRR of ₹10,00,000 is treated as paid-up capital and cannot be distributed as dividend
Answer: CRR created = ₹10,00,000
---
Example 2 — Partial Fresh Issue + Profits (Mixed Redemption)
Ms. Iyer's company, Iyer Infra Ltd., redeems 20,000 preference shares of ₹50 each (fully paid) at par. It makes a fresh issue of 15,000 equity shares of ₹50 each for this purpose. Balance from profits.
| Item | Amount |
|---|---|
| Total nominal value to redeem (20,000 × ₹50) | ₹10,00,000 |
| Proceeds of fresh issue (15,000 × ₹50) | ₹7,50,000 |
| Balance needed from profits | ₹2,50,000 |
| CRR to be created (only the profit-funded portion) | ₹2,50,000 |
Answer: CRR = ₹2,50,000 — only the shortfall funded by profits goes to CRR, not the full redemption amount.
⚠️ Common exam mistakes
- Students think CRR = total redemption amount always. Wrong — CRR equals only the portion redeemed out of profits. If part comes from a fresh issue, CRR is only on the profits-funded shortfall.
- Confusing nominal value with redemption price for CRR. CRR is always based on the nominal (face) value of shares redeemed, never the premium. The premium is handled separately from P&L or Securities Premium Account.
- Forgetting the fully paid-up condition. Students often miss that you simply cannot redeem partly-paid preference shares — the shares must be fully paid before redemption starts.
- Treating the 20-year limit as absolute. Infrastructure projects are an exception — they can exceed 20 years with annual partial redemption. Don't write "maximum 20 years" without adding this caveat in a question that mentions infrastructure.
- Missing the Tribunal angle in sub-section (3). If a question describes a company unable to redeem, students jump to saying it's a legal violation. The correct answer is that it can issue fresh preference shares as a swap — but only with 3/4 shareholder consent AND Tribunal approval.
📖 Bare Act text — Section 55, Companies Act 2013
(click to expand)
(1) No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable. (2) A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed: Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders: Provided further that— (a) no such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption; (b) no such shares shall be redeemed unless they are fully paid; (c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and (d) (i) 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, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed: Provided also that 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. (ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption 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. (3) Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed: Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares. Explanation.—For the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company. (4) The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares. Explanation.—For the purposes of sub-section (2), the term "infrastructure projects" means the infrastructure projects specified in Schedule VI.
Test yourself
Practice questions on this section, AI-graded with citations.
⚡ Practice now →