05 March 2015
Whenever a company redeems its preference shares then the nominal value or face value of the shares is put into capital redemption reserve fund. There after this fund becomes the part of the paid capital of the company.
Capital Redemption Revere is also created when a company buys it owns shares which reduces its share capital.
Suppose, the fresh equity shares or preference shares are issued to redeem the old preference shares, in this case the difference between the face value of preference shares and fresh shares issued will be transferred to capital redemption reserve account.
The capital redemption reserve fund is transferred from undistributed profits i.e general reserves, profit or loss account.
The importance of creation of capital redemption reserve account is due to following reasons:-
# To protect the interest of creditors. # To maintain working capital.
The capital redemption reserve account can 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. No dividend can be distributed out of this fund.
Please refer Section 69 of the Companies Act 2013.
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