The Securities and Exchange Commission of Pakistan (SECP) has allowed
companies to utilize 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.
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