A company returning capital to shareholders must consider both the payment and the legal treatment of its reserves. In India, certain preference share redemptions and share buybacks require a transfer to a capital redemption reserve.
This blog explains what that reserve means, when it is required and how to calculate and record it.
What is Capital Redemption Reserve?
Capital redemption reserve, or CRR, is a statutory reserve created by transferring eligible profits when a company redeems preference shares out of profits. It is also required under section 69 when a company buys back its own shares out of free reserves or its securities premium account.
The capital redemption reserve account records the transfer in the company’s books. It is not a separate bank account or a cash deposit.
Example
Suppose a company redeems 10,000 fully paid preference shares with a face value of ₹100 each. The nominal capital being redeemed is ₹10 lakh.
If the redemption is entirely out of eligible profits, the company transfers ₹10 lakh from those profits to CRR. Separately, it pays ₹10 lakh to the preference shareholders, assuming redemption at face value.
The transfer restricts the distribution of that portion of profits. It does not create another ₹10 lakh of cash.
Why is Capital Redemption Reserve Created?
CRR supports the legal principle of capital maintenance. When preference share capital is redeemed out of profits, an equivalent nominal amount is moved into a restricted reserve instead of remaining available for dividends.
For the relevant capital-reduction provisions, section 55 treats the reserve as if it were paid-up share capital, subject to the section’s exceptions.
This protects creditors by restricting further distributions. It does not guarantee that a company has sufficient cash or that its financial position remains unchanged.
For example, where preference shares are classified as equity, paying ₹10 lakh to redeem them reduces cash and total equity by ₹10 lakh. Transferring profits to CRR changes the composition of reserves; it does not cancel the payment’s financial effect.
When Must a Company Create Capital Redemption Reserve?
The requirement depends on the transaction and its funding source.
Preference share redemption under section 55
Section 55 permits redemption of fully paid preference shares out of profits otherwise available for dividends or the proceeds of a fresh share issue made for that redemption.
When eligible profits replace the redeemed nominal capital, the corresponding amount must be transferred to CRR. A combination of qualifying fresh share capital and eligible profits is also possible.
Share buyback under section 69
When a company purchases its own shares out of free reserves or its securities premium account, section 69 requires a transfer equal to the nominal value of the shares purchased. Details of the transfer must be disclosed in the balance sheet.
The buyback price may be much higher than face value. The CRR amount is linked to nominal value, not the entire payment.
For example, a company buys back 20,000 shares with a face value of ₹10 for ₹150 each, entirely from free reserves. It pays ₹30 lakh, while the CRR transfer is ₹2 lakh.
Redemption financed by a fresh share issue
For preference share redemption, no CRR transfer is required for the nominal capital replaced by a qualifying fresh issue. If only part is replaced, the remaining portion funded out of profits requires CRR.
Receiving money from a new issue does not automatically eliminate the requirement. The amount credited to share capital matters, and issue premium is treated separately.
How is Capital Redemption Reserve Calculated?
For a standard preference share redemption calculation:
CRR transfer = Nominal value of preference shares redeemed − Nominal value of qualifying fresh shares issued for the redemption
The result cannot be negative. Any amount requiring transfer must be supported by eligible distributable profits.
Example: redemption using profits and a fresh issue
A company redeems preference shares with a face value of ₹10 lakh. It issues 40,000 equity shares with a face value of ₹10 at an issue price of ₹15 each for the redemption.
| Particulars | Amount |
|---|
| Nominal preference capital redeemed | ₹10,00,000 |
| Nominal fresh equity capital: 40,000 × ₹10 | ₹4,00,000 |
| Premium on fresh issue: 40,000 × ₹5 | ₹2,00,000 |
| Total cash raised | ₹6,00,000 |
| Required CRR transfer: ₹10,00,000 − ₹4,00,000 | ₹6,00,000 |
The company raises ₹6 lakh in cash, but only ₹4 lakh represents fresh nominal share capital. Subtracting the entire cash receipt would incorrectly reduce the CRR transfer to ₹4 lakh.
Cash availability and capital replacement are separate calculations. ICAI’s teaching material distinguishes fresh share capital from securities premium and explains mixed-funding redemption.
Redemption premium is excluded from the nominal-value CRR calculation.
If the ₹10 lakh preference capital is redeemed at a 10% premium, shareholders receive ₹11 lakh. In the example above, CRR remains ₹6 lakh. The extra ₹1 lakh is redemption premium and must be provided for separately.
Section 55(2)(d) distinguishes between prescribed company classes and other cases. It requires profits in the specified cases, with a transitional provision for certain older shares, and permits profits or securities premium in other cases. The applicable category must therefore be checked before using securities premium for redemption premium.
What Are the Journal Entries for Capital Redemption Reserve?
The CRR transfer debits the eligible profits or reserve being appropriated and credits the capital redemption reserve account.
Using a separate example, assume ₹10 lakh of fully paid, equity-classified preference shares are redeemed at face value entirely out of eligible profits.
| Transaction | Account | Debit | Credit |
|---|
| Transfer eligible profits to CRR | Retained Earnings / Profit and Loss Surplus | ₹10,00,000 | |
| | Capital Redemption Reserve | | ₹10,00,000 |
| Recognise amount due on redemption | Redeemable Preference Share Capital | ₹10,00,000 | |
| | Preference Shareholders Payable | | ₹10,00,000 |
| Pay preference shareholders | Preference Shareholders Payable | ₹10,00,000 | |
| | Bank | | ₹10,00,000 |
An eligible general reserve may also be debited where appropriate. The chosen account must represent profits legally available for the transfer.
The first entry appropriates accumulated profits. It is not an ordinary operating expense. The final entry records the cash payment.
Read more about journal entries and how debits and credits are recorded.
What Can Capital Redemption Reserve Be Used For?
The Companies Act expressly permits CRR to be applied towards paying up unissued shares that are issued to members as fully paid bonus shares. A bonus issue must also meet the applicable statutory conditions.
For example, if a company validly capitalises ₹2 lakh of CRR for a bonus issue, CRR decreases by ₹2 lakh and share capital increases by ₹2 lakh. That capitalisation does not itself pay cash to shareholders.
CRR is not a free reserve available for ordinary dividends. It cannot simply be transferred to the profit and loss account to absorb routine losses or treated as a freely spendable balance.
However, the reserve does not represent separately locked cash. A company’s actual bank balances and its legal ability to use them are different questions from the restrictions on the CRR ledger account. Any proposed reduction or release requires consideration of the applicable legal process.
Where is the Capital Redemption Reserve Shown in the Balance Sheet?
CRR is presented separately within equity or reserves, according to the applicable Schedule III format.
| Reporting framework | Presentation |
|---|
| Schedule III Division I, for companies following Accounting Standards | Separately within Reserves and Surplus |
| Schedule III Division II, for companies following Ind AS | Within Other Equity, with separate reserve disclosure in the notes |
It is not an asset or a repayment liability. It generally has a credit balance.
A reserve movement schedule should distinguish the opening balance, transfers during the year, permitted utilisation and closing balance. Section 69 specifically requires disclosure of the buyback-related transfer.
For the broader structure, read about the balance sheet.
How Does CRR Differ From Other Reserves?
Similar names do not mean that reserves have interchangeable purposes or uses.
| Account | Main distinction |
|---|
| Capital redemption reserve | Restricted statutory reserve associated with qualifying preference share redemptions and share buybacks |
| Capital reserve | Reserve arising from particular capital transactions; treatment depends on the transaction and applicable accounting rules |
| General reserve | Reserve commonly built from retained profits; availability depends on relevant legal conditions |
| Securities premium | Amount received above the face value of issued shares, with uses governed by section 52 |
| Debenture redemption reserve | Reserve associated with debenture redemption where section 71 and Rule 18(7) require it |
CRR concerns share capital transactions. DRR concerns debentures, and its requirement depends on the issuer and issue category. It does not apply identically to every company issuing debentures.
What Mistakes Should Companies Avoid When Creating CRR?
The main errors concern the transfer amount, eligible source and presentation.
- Using the full payment instead of nominal value: Redemption or buyback premium is separate from the face-value CRR amount.
- Subtracting fresh issue premium: Premium received on new shares does not replace nominal share capital for the CRR calculation.
- Treating cash as distributable profit: A healthy bank balance does not establish eligible profits.
- Assuming CRR preserves net worth: The reserve transfer does not reverse the effect of a payment to shareholders.
- Using the wrong reporting heading: Presentation depends on the company’s accounting framework.
- Overlooking supporting records: Retain the calculation, approvals, source-profit assessment, entries and payment evidence.
Errors in these records can contribute to audit risk and make the transaction harder to verify.
Frequently Asked Questions
Does a private company need to create CRR?
Private-company status does not, by itself, remove the section 55 requirement for preference share redemption out of profits or the section 69 requirement for a qualifying buyback. The transaction and funding source determine applicability.
Can an existing CRR balance replace a new transfer?
An existing CRR balance should not simply be deducted from the transfer required for a new redemption. The new transaction must be assessed separately, including eligible profits and qualifying fresh nominal capital.
Can a bank loan replace the need for CRR?
A loan may provide liquidity, but it does not count as a fresh share issue or create distributable profits. Cash raised through borrowing therefore does not, by itself, remove the capital-maintenance requirement.
What happens if the company has cash but insufficient eligible profits?
Cash alone is insufficient to support redemption out of profits. The company must assess a lawful route, such as a qualifying fresh share issue, rather than record an unsupported CRR transfer.
Is capital redemption reserve the same as cash reserve ratio?
No. Capital redemption reserve is a corporate accounting reserve. Cash reserve ratio is a banking requirement. Both may be abbreviated as CRR, but they refer to different concepts.
