ISLAMABAD - The Securities and Exchange Commission of Pakistan (SECP) has allowed companies to utilise capital redemption reserve to issue fully paid bonus shares. The companies can, however, issue the said bonus shares subsequent to redemption of preference shares under Section 85 of the 1984 Companies Ordinance. A notification to this effect is being issued in this regard.
The aforesaid decision was taken in light of the practical difficulties faced by companies regarding utilization of the redemption reserve. Essentially, Section 85 of the ordinance provides for redemption of preference shares by a company and lays down certain provisions for such redemption. These provisions include the creation of a redemption reserve fund by transferring from profits, a sum equal to amount applied in redeeming of the preference shares. The amount in respect of such reserve, however, keeps on appearing in the financial statement of the company after complete redemption of preference shares. The subject ordinance is silent about the subsequent treatment of such reserve.
After detailed deliberations by the Enforcement Department, including the study of different international jurisdictions and associated provisions, the SECP has allowed this treatment. The subsequent treatment of the capital redemption reserve fund is expressly defined in the corporate laws of international jurisdictions such as the 1956 Indian Companies Act, the 2005 Companies Act of the UK and the 1991 Companies Ordinance of Hong Kong, but the 1984 Companies Ordinance is silent about such treatment.
The new treatment will allow the companies to utilize the reserve and increase the capital base of the companies.