Capital Redemption Reserves Account

Introduction:

Capital Redemption Reserve (CRR) is a statutory requirement of the Companies Act which mandates, this is a fund especially meant for buying back its preference shares from the shareholders at either their nominal market value or at their value. A company repurchasing its own shares from the market must transfer an amount equal to the nominal or face value of the shares bought back to an account which is the CRR account. The above CRR fund becomes a part of the paid-up share capital. 

The provisions related to Capital Redemption Reserve are underlined in section 69 of the Companies Act 2013.

• Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.
• The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.^[1]

Definition of a Reserve

A reserve means an amount of money kept aside from the revenue stream and earned profits for specific purposes such as meeting unexpected liabilities or for the purchase of an asset.

As observed by the assessment authority in the case of Canfin Homes Ltd. Bangalore vs Assessee^[2] it was observed that:

“A reserve by its very nature is a fund which is created and maintained for the purpose of being drawn up in future. ……A mass of undistributed profits cannot automatically become a reserve and somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either as a general reserve or as a specific reserve.”

Ways of Capital Redemption

• By further issuing preference capital.
• From redistributable profits.
• By paying a premium.
• Proceeds of a fresh issue of capital
• Both from redistributable profits and proceeds of a fresh issue of capital.

Restrictions on usage of CRR

• No transfers can be made out of capital reserves into the capital redemption reserve.
• The balance of CRR is to be used exclusively for issuing fully paid bonus shares to members of the company.
• Reserves are generally classified based on their source of accumulation. CRR is required to be classified as both a capital and a statutory reserve.
• If there are undistributed profits present on the credit side of the accounting books of a company, they cannot be utilized for funding CRR.
• The creation of CRR from accumulated and undistributed profits requires prior broad approval, and any accounting entries regarding the same must be approved by the audits and accounts committee of the company.
• The preference shares may be redeemed at any time at the shareholder’s or the company’s option or the happening of a certain event.

Any preference shares issued can be redeemed by the company within 20 years of the date of issue but is subject to certain conditions

• The above must be permitted by the articles of association of the company.
• CRR must be made out of either undistributed profits or from proceeds of fresh issue of capital or both.
• Only fully paid-up shares can be subject to redemption even those fully paid-up shares that are not issued yet.
• In case premium payments are to be made in case of premium, it must be done through the accumulated profits or out of the Securities Premium Account.
• CRR may also be used to pay for any unissued shares which may be issued in the future as fully paid-up shares in compliance with the provisions underlined in section 133 of the Companies Act, 2013.
• If the shares are bought back, then an amount equal to either the face value or nominal value of the shares purchased must be transferred to the CRR account and the details of the above transaction must be disclosed in the final books of accounts of the company.

Procedure

In case of companies that have listed their non-convertible securities on the stock market, shall prior intimation of the board meeting be held with the agenda of Capital Redemption at least 11 days before the redemption amount becomes payable as per [Regulation 50 of the SEBI (LODR), 2015]

• Convening a meeting of the board of directors as per section 173 & SS-1. A draft shall be prepared of the board minutes and circulated within 15 days after the end of board deliberations.
• After the board meeting, payment of the redemption amount is made along with the premium amount (if any).
• Subsequently all related and relevant entries of the transactions and other changes are made in the books of accounts and the register of members, respectively.
• After making such entries, every necessary corporate action shall be made, and legal compliance in accordance with the governing provisions and regulations shall be ensured.
• The company then will file a notice with the ROC (Registrar of Companies) in Form SH-7 within 30 days after redemption along with a copy of the board resolution authorizing such redemption.
• Finally, an amount equal to the value of shares redeemed shall be transferred to the Capital Redemption Reserve account.

SEBI regulations governing Redemption of Shares

• Regulation 51 of the SEBI (LODR) Regulations, 2015^[3]

A company that has listed its non-convertible shares on the stock exchange must provide a notice to the Stock exchange, with the information about any action which may lead to the redemption of said non-convertible shares.

• Regulation 60 of the SEBI (LODR), 2015

A company that has listed its non-convertible shares on the stock exchange must inform the Stock exchange with advance notice at least 7 working days in advance of the record date on which the redemption is to take place.

Ways of Redemption of Shares

Through the proceeds of fresh issue of capital

Advantages:

• No cash outflow
• Retention of interest by Shareholders
• New shares may be valued at a premium

Disadvantages:

• Share-holding structure is changed
• Future earnings of the company are diluted

Through the utilization of undistributed profits

Advantages:

• Utilization of surplus funds
• There is no change in the equity shareholdings of the company

Disadvantages:

• This method of capital redemption may result in the reduction of liquidity in the future.

Section 80 of the Companies Act, 2013

Part 1

• No redemption can be made in any other way except out of undistributed profits or through revenue realized from fresh issues of new capital or through a combination of both. The above ways are the only two ways in which a firm may redeem or ‘buy back’ its shares.
• Only fully paid-up shares shall be issued. Based on such redemption, only bonus shares may be issued.
• Premium (if any) shall be paid out of undistributed profits before redemption of shares or through the Securities premium account.
• If shares are redeemed out of profits, an amount equal to either the face value or nominal value (premium included if any) must be transferred to the Capital Redemption Reserve Account.

Part 2

The act of redemption shall also be carried in consideration to the Articles of Association.

Part-3

Redemption is not to be taken as an activity that reduces the amount of share capital.

Part-4

Irredeemable shares cannot be issued under any provisions provided in the Companies Act 2013.

Part-5

• Fully funded bonus shares may be issued based on the Capital Redemption Reserve (CRR).
• Notwithstanding any provisions of the Companies Act 2013, no company can issue preferences that are redeemable or irredeemable within 10 years.

Part-6

Failure in compliance with the provisions of this section shall result in the company and its officers being fined for default which may extend up to Rs 1000.

Conclusion

Capital Redemption Account must be maintained both as capital and statutory reserve for the specific purpose of buying back or repurchasing preference shares at either a nominal value or their face value with or without a premium. Several provisions have been underlined in the Companies Act and guidelines are given by SEBI to prevent the financial interests of investors from getting undermined and stop corporations from carrying unethical business practices. CRR as the name suggests is a reserve, reserves are generally recognized from the source of revenue using which they are formed, the maintenance of a CRR account is compulsory under the provisions of the Companies Act, and one of the sources of forming a CRR can be through the proceeds from fresh issue of capital, the above reasons make the CRR a capital and statutory reserve at the same time.

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References:

[1] Section 69, Companies Act 2013, Constitution of India.

[2] Canfin Homes Ltd. Bangalore vs Assessee I.T.A No.861/Bang/2010

[3] SEBI regulations 50 and 61

Other Sources

1. https://www.jandkicai.org/pdf/16779Preference_Shares.pdf
2. https://blog.ipleaders.in/what-is-a-capital-redemption-reserve-account-and-why-is-it-maintainedhat-is-a-capital-redemption-reserve-account-and-why-is-it-maintained/
3. http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17434
4. https://www.lawrbit.com/companies-act-procedures/redemption-of-redeemable-preference-shares/
5. https://www.google.com/search?q=capital+redemption+reserve+companies+act%2C+2013&rlz=1C1CHZN_enIN936IN936&oq=c&aqs=chrome.2.69i60j69i59l3j69i57j69i60l3.2131j0j7&sourceid=chrome&ie=UTF-8
6. https://indiankanoon.org/doc/1381280/