What are Redeemable Shares?
Redeemable shares are a type of equity or preference shares that a company has the right to repay to shareholders after a specified period or under certain conditions outlined at issuance. These shares offer flexibility as they can be reacquired by the issuing company, providing financing and restructuring options.
Key Characteristics of Redeemable Shares
- Right to Redeem: The issuing company has the option to redeem the shares, either at the shareholders’ request or at the company’s discretion, depending on the terms.
- Specified Terms: Redemption conditions, like the time, price, and circumstances under which shares can be bought back, are set at the issuance.
- Fund Sources: Redemption can be funded from distributable profits or fresh issue of shares.
- Premium Handling: If issued or redeemed at a premium, the premium can be managed from the share premium account.
- Capital Adjustment: If redemption reduces the company’s capital without replacement from a fresh issue, a capital redemption reserve account must be credited to maintain creditors’ protection.
Examples of Redeemable Shares
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Retail Company Ltd. issues 1,000,000 preference shares at $10 per share with a clause allowing redemption after 5 years at $12 per share. The redemption is financed through distributable profits.
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Tech Innovators Inc. issues redeemable shares at a 5% premium. The redemption premium is recorded in the share premium account, ensuring that capital adjustments are properly managed.
Frequently Asked Questions (FAQs)
Are redeemable shares advantageous for companies?
Yes, they offer financial flexibility, aids in capital structure management, and provides an opportunity to return excess capital to shareholders.
Can all shares be redeemed?
No, only those shares that are explicitly issued as redeemable) under pre-defined conditions can be redeemed.
What happens if a company lacks funds to redeem shares?
The company may issue new shares to raise funds for redemption or delay the redemption under specific terms, maintaining regulatory compliance.
How does redemption affect shareholders?
Shareholders receive the redemption amount, which may include a premium, thus benefiting from a return on investment.
Is there any regulatory oversight on redeemable shares?
Yes, the terms and conditions for issuance and redemption of shares are regulated to protect shareholders and maintain corporate governance standards.
Related Terms
Ordinary Shares
Ordinary shares represent equity ownership in a company, providing voting rights and a variable dividend.
Preference Shares
Preference shares are shares that provide a fixed dividend and priority over ordinary shares in asset distribution upon liquidation.
Distributable Profits
Profits available for distribution to shareholders as dividends, after obligations and reserves are accounted for.
Share Premium Account
A reserve created by the difference between the issue price and the nominal value of shares, often used to fund premium on redemption.
Capital Redemption Reserve
A reserve to maintain capital levels when redeeming shares in the absence of a fresh issue.
Online References
- Investopedia - Redeemable Shares
- Harvard Law School - Corporate Finance
- Finance Theory - Understanding Share Classes
Suggested Books for Further Studies
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jaffe
- A comprehensive guide about corporate finance, including redeemable shares and capital structure management.
- “Financial Markets and Corporate Strategy” by David Hillier
- Provides insights into the inclusion of redeemable shares in corporate finance strategies.
Accounting Basics: “Redeemable Shares” Fundamentals Quiz
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