Redemption of Preference Shares

The process or requirement of repaying the capital of preference shares to the shareholders is referred to as redemption of preference shares. A firm can only redeem its preference shares according to the terms that were stated at the time of issuance or as amended once the shareholders of those preference shares have given their assent. The terms of the issue of these shares provide that the firm would refund the amount invested by the shareholders in the company at a later period, as well as pay a set amount in the form of interest on a regular basis over the contract's term.

The date of redemption is the maturity date that is given in the preference share certificate. Redemption of preference shares helps the company in adjusting the financial structure. The redemption of these shares takes place:

• At a fixed time or on the happening or completion of an event,
• Any time when the issuance company wants, or
• Any time when the shareholders want.

Why Do Companies Issue Redeemable Preference Shares?

There are certain reasons because of why a company may issue redeemable preference shares. They include the followings:

• It is an efficient way for a company to raise funds or to attract investors in a dull primary market.
• There can be difficulty arising for a company in raising the funds if its shares are not traded on the stock exchange. In such a case, the potential customers may feel hesitant in investing money in the shares of that company due to the high risk as the shares cannot easily be sold. Redeemable preference shares can be a better option to tackle this problem and encourage investors.
• The company can redeem the preference shares only when there is a surplus of capital in the company and this surplus can't be used by the company for the profitable purpose of the business. So the companies issue redeemable preference shares to get this benefit also.

In our country, Section 55 of the Companies Act, 2013 governs the issue and redemption of preference shares.