What is true about redeemable shares in terms of funding?

Redeemable shares are a specific type of share that a company can issue with the option for the company to repurchase the shares at a later date. When it comes to funding these shares, the most crucial aspect lies in how they can be paid back to shareholders when they are redeemed. According to company law, the redemption of shares must typically be funded through distributable profits. This means that a company can only use its profits available for distribution (like retained earnings) to buy back these shares, ensuring that the company does not jeopardize its capital base by returning funds to shareholders without sufficient earnings.

Distributable profits provide a legal framework for protecting creditors and maintaining the company's capital integrity, thereby aligning with the financial stability principles of the entity. In many jurisdictions, this restriction is in place to prevent companies from returning capital to shareholders in ways that could undermine the financial structure of the business.

The other options mention aspects of redeemable shares that do not align with the legal framework or common financial practices associated with their funding. Specifically, redeemable shares cannot be financed through capital reserves, as capital reserves are typically not distributable profits; they exist for specific purposes defined by law. Similarly, claiming they do not require any financial association is misleading because redeemable