Redemption of Preference Shares by Fresh Issue of Shares
One of the methods for the redemption of preference shares is to use the proceeds of a fresh issue of shares. A company can issue new shares (equity share or preference share) and the proceeds from such new shares can be used for the redemption of preference shares.
The proceeds from the issue of debentures cannot be utilized for this purpose.
A problem arises when a fresh issue is made for the redemption of preference shares, at a premium. The point to ponder is whether proceeds of a fresh issue of shares will include the amount of securities premium for reference shares.
For securities premium account, Section 52 of the Companies Act, 2013 provides that the securities premium account may be applied by the company;
(a) Towards issue of un-issued shares of the company to be issued to members of the company as fully paid bonus securities
(b) To write off preliminary expenses of the company.
(C) To write off the expenses of, or commission paid, or discount allowed on
any of the securities or debentures of the company
(d) To provide for premium on the redemption of redeemable preference shares or debentures of the company.
(e) For the purchase of its own shares or other securities.
If maybe noted that certain clIts of Companies whose financial statements comply with the Accounting Standards as prescribed under Section 133 of the Companies Act, 2013, can’t apply the securities premium account for the purposes (b) and (d) mentioned above.
Any other way, except the above-prescribed ways, in which securities premium account is utilized# will be in contravention of the law.
Thus, the proceeds of a fresh issue of shares will not include the amount of
securities premium for the redemption of preference shares.
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