Section 77A and 80 of the Companies Act, 1956 deal with Capital redemption reserve.
As per section 80 where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve fund, to be called [ the capital redemption reserve account], a sum equal to the nominal amount of the shares redeemed; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if 1[ the capital redemption reserve account] were paid- up share capital of the company.
11 January 2013
A capital redemption reserve is an established fund that holds money in reserve to protect a company from the loss of capital. A company protects itself from such a loss by essentially setting aside the same amount of capital required for the specific transaction. Further, by maintaining the capital redemption reserve, the company can set aside adequate funding to pay creditors in the event the company runs into fiscal problems. Additionally, a company can use the capital redemption reserve for specific purposes with court approval.
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