One another illustration of this kind of reserve is options, where shareholders contribute funds to purchase an option which offers them the privilege to purchase shares at a later date. Shareholders who are willing to pay the company are permitted to exercise the right of an option by exercising an option to purchase shares later. If a shareholder fails to pay the calls on partly paid shares, then such part amount paid by such applicant will be transferred to forfeited shares reserve account. Under the law, a company is not required to return the money to such defaulted applicants.
Thus, the applicants will lose their money if they fail to pay the call money, However, a company can reissue such forfeited shares at a full price to any new applicants Thus, money stands to the credit of call money account will be transferred forfeited share reserve account. (Hey-Cunningham 2002: 157). A private company is entitled to redeem shares out of capital. However, according to Companies Act, in case of other companies, shares may be redeemed only out of company’ s distributable profits or out of the capital raised by the issue of new shares solely for the redemption.
According to S. 170, in the case where the share is redeemed out of gains of the business, a sum equivalent to their nominal value should be transferred from gains of the business to a separate capital redemption reserve. This share redemption reserve is just like the share premium account which is a statutory capital reserve. It is to be noted that no capital redemption reserve is needed if the redemption is made out of the fresh issue of shares and in such cases, proceeds of the fresh issue are used to repay the debentures.
( De Freitas 1989). In case, if the shares are to be redeemed at a premium, the fundamental rule is that the premium must be deferred out of distributable profits. If shares are originally issued on premium, then balanced in the share premium account may be utilized to meet the premium obligation while at the time of redemption of shares.
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