Redemption of preference shares explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
When a company repays its redeemable preference shares, paid-up capital falls. The Act does not let that happen at the cost of the creditors' cushion, so it allows redemption only out of two sources and requires the capital that disappears to be replaced, in the books, by a reserve that cannot be paid out as dividend. This guide sets out the section 55 conditions in plain words, the entries, and an invented company worked through to its balance sheet. The books side of such a redemption is part of what our books of accounts and compliance team handles.
Preference shares may be redeemed only out of profits that would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purpose, and only if they are fully paid (section 55(2), provisos). When profits are used, an amount equal to the nominal amount redeemed out of those profits goes to a capital redemption reserve. The premium on redemption must be provided for before redemption: out of profits, or, for companies not in the prescribed class, out of profits or securities premium.
What section 55 says
| Provision | What it requires | What it means in the books |
|---|---|---|
| Section 55(1) | A company limited by shares may not issue irredeemable preference shares | Every preference share has a redemption date |
| Section 55(2) | If the articles authorise, preference shares may be redeemable within a period not exceeding twenty years from issue, subject to prescribed conditions; a longer period is allowed for infrastructure projects | Check the articles and the rules before fixing terms |
| Proviso (a) | Redemption only out of profits otherwise available for dividend, or the proceeds of a fresh issue made for the purpose | Show where the money comes from before posting |
| Proviso (b) | Not redeemed unless fully paid | Collect any unpaid calls first |
| Proviso (c) | Where redeemed out of profits, a sum equal to the nominal amount of the shares to be redeemed is transferred out of such profits to the Capital Redemption Reserve Account, which is treated as paid-up share capital for the reduction provisions | Transfer from reserves or the profit and loss balance to CRR |
| Proviso (d) | For the prescribed class of companies following the standards under section 133, premium on redemption is provided for out of profits before redemption; otherwise out of profits or securities premium | Create the premium payable before redeeming |
| Section 55(4) | The reserve may be applied in paying up unissued shares as fully paid bonus shares | CRR is one of the sources of a bonus |
The section is explained in Section 55: preference shares, including the prescribed conditions; our older note issue and redemption of preference shares gives the background. The phrase "profits available for dividend" is the Act's own test of distributable profits. Where only part of the shares is redeemed out of profits, read the proviso as requiring the reserve for that part: the nominal amount of the shares redeemed out of profits, with the fresh issue covering the rest. If the position is close, confirm it with your auditor.
Method
- Confirm the shares are fully paid and the articles authorise redemption.
- List the distributable profits (general reserve and profit and loss balance, less anything the Act does not allow), and take off the premium on redemption.
- If the profits left are less than the nominal amount to be redeemed, the shortfall is the minimum fresh issue (at face value of new shares).
- Pass entries: fresh issue; provide for premium out of profits; transfer the redeemed capital to preference shareholders; pay them; transfer profits to CRR.
- Redraw the equity part of the balance sheet.
Worked example: Dhruv Auto Components Private Limited
The entity and all figures in this example are invented for illustration.
Dhruv Auto has 10,00,000 of equity share capital and 5,000 preference shares of 100 each, fully paid (5,00,000), redeemable now at a premium of 10 per cent. Its other balances: general reserve 2,00,000, profit and loss balance 1,50,000, creditors 4,50,000. Assets: fixed assets 11,00,000, other current assets 5,00,000, bank 7,00,000.
Workings.
- Redemption amount: 5,000 x 110 = 5,50,000 (nominal 5,00,000 and premium 50,000).
- Distributable profits: 2,00,000 + 1,50,000 = 3,50,000; less premium 50,000 = 3,00,000 available for the reserve.
- Minimum fresh issue: 5,00,000 less 3,00,000 = 2,00,000, so 20,000 equity shares of 10 issued at par.
- Capital redemption reserve: 5,00,000 less 2,00,000 fresh issue = 3,00,000, taken from general reserve 2,00,000 and profit and loss 1,00,000.
| Particulars | Debit | Credit |
|---|---|---|
| Bank Dr | 2,00,000 | |
| To Equity share capital | 2,00,000 | |
| Profit and loss Dr | 50,000 | |
| To Premium payable on redemption | 50,000 | |
| Preference share capital Dr | 5,00,000 | |
| Premium payable on redemption Dr | 50,000 | |
| To Preference shareholders | 5,50,000 | |
| Preference shareholders Dr | 5,50,000 | |
| To Bank | 5,50,000 | |
| General reserve Dr | 2,00,000 | |
| Profit and loss Dr | 1,00,000 | |
| To Capital redemption reserve | 3,00,000 | |
| Total | 16,50,000 | 16,50,000 |
| Capital and liabilities | Before | After | Assets | Before | After |
|---|---|---|---|---|---|
| Equity share capital | 10,00,000 | 12,00,000 | Fixed assets | 11,00,000 | 11,00,000 |
| Preference share capital | 5,00,000 | nil | Other current assets | 5,00,000 | 5,00,000 |
| Capital redemption reserve | nil | 3,00,000 | Bank | 7,00,000 | 3,50,000 |
| General reserve | 2,00,000 | nil | |||
| Profit and loss | 1,50,000 | nil | |||
| Creditors | 4,50,000 | 4,50,000 | |||
| Total | 23,00,000 | 19,50,000 | Total | 23,00,000 | 19,50,000 |
Check. Bank after: 7,00,000 + 2,00,000 - 5,50,000 = 3,50,000. Both sides of the balance sheet total 23,00,000 before and 19,50,000 after. Paid-up capital plus CRR before: 15,00,000 (equity and preference); after: 12,00,000 + 3,00,000 = 15,00,000, so the capital base is intact. Debits and credits in the entries both total 16,50,000.
How it shows in the financial statements
Under Schedule III, Division I, the capital redemption reserve is shown under reserves and surplus. The share capital note discloses the rights, preferences and restrictions on each class of shares, so the terms of redemption and the date should be traceable until the shares are redeemed.
Common mistakes
- Redeeming shares that still have unpaid calls.
- Transferring the premium to CRR instead of providing it out of profits (or, where allowed, securities premium).
- Making the transfer to CRR before computing how much of the redemption the fresh issue covers.
- Treating the capital redemption reserve as available for dividend; the Act treats it as paid-up capital for reduction purposes.
Need help with redeeming preference shares?
If your company has redeemable preference shares falling due, our team can check the funding, the reserve and the resolutions, and keep the books and returns consistent. See our books of accounts and compliance page and send us the latest balance sheet and the terms of issue.
Key takeaways
- Redeem only out of distributable profits or a fresh issue for the purpose, and only fully paid shares.
- The reserve equals the nominal amount redeemed out of profits; the fresh issue covers the rest.
- Provide for the premium on redemption before redeeming.
- The capital redemption reserve behaves like paid-up capital and can fund a bonus issue.
- Total capital plus reserve before and after redemption should agree.
Read next
- Redemption of debentures: reserve, investment and entries
- Bonus issue and rights issue: accounting entries
- Buy-back of shares: accounting entries and tests
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.