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Why does a preference share need to be fully paid up on redemption?Because those are the rules laid down by the Indian Companies Act and in the agreement which has all the T&C of the preference share issue. The date of redemption is when the company has to repay the preference shareholders in full.It’s as simple as that. I hope you’re not confusing redemption with buybacks. They’re totally different from each other. If that’s your doubt, ask me in the comments section below and I shall explain. I wrote another answer which you might find useful: What does ‘redeemable share preference share’ mean?Goodnight.Co-Founder & CEO, Fyers - Your Next-Generation Online Stockbroker
Would you be more likely or less likely to invest in a startup with a share redemption fund?Neither for me; because redemption "offer" is but one of the myriad of levers a VC should look at to understand whether such tools give adequate coverage to one's investment.My answer is based on the fact that if I ever have to implement and invoke a redemption right on a start up, I don't really see that as said investment - as a VC - succeeding, and neither will my shrewd LPs who will look for more than a mere 3X cashout. That being said I can see where the appeal could be if you are dealing with super lean angels who have taken considerable risk - compared to their net worth - to invest their liquidity and would very much like a shorter horizon on return.
Do preference shares need to be fully called up to be eligible for redemption?To answer the question, no, not to be eligible. They are eligible for redemption when the original requirements are met, normally 5 or 10 years. The company does not HAVE to redeem, just because they are eligible, but once a redemption is announced, all shares go, and there is no sense in being stubborn and holding on to the shares. Turn them in, no matter how much you like the shares. The difference is convertible shares which may have maybe met the conversion requirement, but a holder may continue to collect dividends until the time (probably not long in coming) when the shares are called, or forced to convert.Once the “call” or redemption is announced, all shares are taken.
What are the accounting entries relating to the redemption of preference shares?Following entries are passed while redemption of preference shares:When preference shares are due on the maturity date with its premium amount. At that time, we will pass following journal entry.Redeemable preference share capital account Dr. ( With face value)Premium on Redemption Account Dr. ( with the premium to be paid)Preference Shareholders Account or Preference Share Redemption Account CreditIf company uses his old profit reserves for repayment to preference shareholders. It means, company has saved money out of his profit for this day. We take this money by passing following journal entry.Profit and loss account Dr. or General Reserve Account Dr.Capital Redemption Reserve Account Cr.If company issues new equity shares for redemption of preference shareholders.Bank Account Dr.Equity Share Capital Account Cr.If company sells its assets on the loss for getting fund for repayment to preference shareholdersBank Account DrProfit and Loss Account Dr. ( Loss on sales of assets )Particular Asset Account Cr.When Company Pays to Redeemable Preference Shareholders.Preference Shareholders Account Dr.Bank Account Cr.When Company converts preference share capital into equity share capital.At that time, we will not pass above entries, we will pass only following entry.Preference Share Capital Account Dr.New Equity Share Capital Account Cr.Hope it Helps !
How do I share my Google from to people to fill out?Actually, if you hit the edit button, it will take you to your editting page (which by the way only you can access), at the top right there's a send button. It will generate a proper shareable link for you.
What are the common conditions of preferred shares in Silicon Valley with regards to redemption rights?A redemption right permits the investors to require the company to repurchase their shares after a specified period of time; it is, in effect, a “put” right – that is, the investors may elect to put their shares back to the company. As a practical matter, however, redemption rights are rarely exercised and, according to Fenwick & West’s recent VC survey, only 20% of the deals in the San Francisco Bay area included such rights. Redemption rights are principally designed to protect investors from a situation where, after a period of time, their portfolio company is just moving “sideways” and, accordingly, is not an attractive acquisition target or IPO candidate. Investors are thus given the opportunity to exit their investment byexercising their redemption rights – which is particularly important becauseventure capital funds have limited lives (typically 10 years).The problem, of course, is that a so-called “walking dead” company rarely has the cash to buy-back the investors’ shares. Moreover, there are signNow restrictions under applicable State law regarding redemptions if the company does not have the legally-available capital. There are several issues founders should focus on in connection with redemption rights. First, founders should push back to knock them out entirely because, as noted above, they are not the norm and rarely implemented. If the investors insist on redemption rights, the founders should only agree if such rights cannot be exercised until at least five years after the closing. Founders should also try to limit the redemption price to amount equal to the investment -- and push back hard on any cumulative dividends.Investors will sometimes try to add enforcement provisions to give their redemption rights some teeth; for example, the investors may require that if the company defaults (cannot pay the redemption price in cash), then the investors will have the right to elect a majority of the Board of Directors until the redemption price is paid in full and/or the Company will be required to pay the redemption price via the issuance of promissory notes. Again, the founders should push back hard.Finally, founders should watch-out for unusual redemption rights, such as a “MAC” redemption pursuant to which investors are given the right to redeem their shares if the company “experiences a material adverse change to its business, operations, financial position or prospects.” This is a non-starter.
Can a capital redemption reserve be used to issue fully paid bonus shares for equity shareholders?Firstly one must understand a basic rule- Creditors (outsiders) are given priority over shareholders/ members (insiders).Okay, consider this analogy.My mom makes amazing Laddus. However, when we have guests visiting us, I never get a chance to eat those delicious laddus unless the guests get their share.You see, here I am the member (insider) and the guests are the outsiders. As per the rule, guests must be served first and the members get the leftovers.This same applies for the companies as well. Hence, in any case outsiders must be paid first and then the members.Free Reserves belong to the members (insiders).Free Reserves of the company are nothing but the reserves which are freely usable for the purpose of declaration of dividend to the shareholders/ members (insiders).Hence, the creditors won't have any problem if the company is distributing free reserves to the members before the creditors are paid as the free reserves as a general rule, belongs to shareholders.When would the creditors feel unsafe?In any case where the shareholders are paid and redeemed before them, they would feel unsafe.As the funds of the company are used to pay the shareholders first and hence there may arise a possibility that the funds are lacking for the payment to creditors.In such cases, such as redemption of shareholders, a new account is created. This new account is known as CRR (Capital Redemption Reserve)Why is the CRR created?The basic reason is to simply lock the usage of free reserves for the purpose of distribution of dividend to the members, to the extent of redemption of shares.Hence, as the amount of free reserves is transferred to CRR, this amount is locked and has been restricted for further usage to the members. All this is done to make the creditors feel safe that their interest is protected.Can CRR be used for the purpose of giving bonus shares?Absolutely yes!The reason behind this is that in case of giving bonus shares, there is no outflow of cash. No cash outflow would mean that there is no risk to creditor that the company may run out of cash by giving bonus shares.You see, this was not the case with dividend. As dividend involves cash outflow, CRR can’t be used for the purpose of giving divided as it is not a free reserve (hence locked and restricted).Hope this clears everything.
What are the conditions to be fulfilled for redemption of preference shares?1. A company should be authorized by its articles to issue redeemable preference shares within a period not exceeding twenty years.2. The preference shares should be redeemed out of i) profits available for dividend or ii) out of proceeds of fresh issue of shares made for the purpose of redemption.3. If redemption is out of profits available for dividend, then a sum equal to the nominal amount of the shares redeemed is required to be transferred to Capital Redemption Reserve Account (utilisation of CRR Account is further restricted to issuance of fully paid-up bonus shares only).In a scenario where part of the redemption is financed by fresh issue and part by profits, then:Amount to be transferred to the CRR = Nominal Value of the Preference Shares to be redeemed Less Proceeds of Fresh Issue of Share Capital (being Nominal value of Equity Shares issued)Hope the above was useful.