Share Capital Redemption - A Twist!
company ailet advanced trick_questionCompany Law questions in AILET usually seem straightforward, but not this one from AILET 2019. Question 26 was: "A company limited by shares has a paid-up share capital of ₹ 50 lakhs divided into 5 lakhs equity share of ₹ 10 each. If the directors of the company propose to redeem 20% of its equity share capital out of profits of the company and the company has a distributable surplus of ₹ 1 crore, what will be the amount to be transferred to the capital redemption reserve?"
Most students get this wrong because they forget that the distributable surplus (₹ 1 crore) includes retained profits and should be adjusted by the amount that needs to be set aside for dividend, if any. The share redemption amount is calculated based on distributable profits only and not the total surplus.
Arre yaar, redemption of shares is a tricky topic, especially when company's net worth is less than 11 crores. According to Companies Act, 2013, company can redeem shares only if its net worth is not less than 11 crores. But, now a twist! Section 62(1)(c) says if company is authorized by its MoA, it can redeem shares even if its net worth is less than 11 crores. So, careful reading of MoA needed!