Conditions for redemption of Preference Shares:
Under section 80 of the Companies Act, 1956, a company should have to follow the conditions:
1. There must be a provision in the Articles of Association regarding the redemption of preference shares.
2. The redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted in to fully paid shares before redemption.
3. The redeemable preference shareholders should be paid out of undistributed profit/ distributable profit or out of fresh issue of shares for the purpose of redemption.
4. If the shares are redeemed at a premium, it should be should be provided out of securities premium or profit and loss account or general reserve account.
5. The proceeds from fresh issue of debentures cannot be utilized for redemption.
6. The amount of capital reserve cannot be used for redemption of preference shares.
7. If the shares are redeemed out of undistributed profit , the nominal value of share capital, so redeemed should be transferred to Capital Redemption Reserve Account. This is also known as capitalization profit.