LIVE GST Certification Course by CA Arun Chhajer begins 21st April. Register Now!!

capital redemption reserve.

ravi_ (article -bonded labour- trainee) (141 Points)

26 August 2008

Why do we create CRR, ok its mandatory to create it u/s 77a of companies act, but what is the rationale behind transferring the amount of nominal value of shares bought back to CRR. whom this reserve will benefit? as DRR is created to secure the redemption of debentures.

Reply
Follow
Share

8 Replies

CA MOHIT VAATS (Consultant) (554 Points)
Replied 26 August 2008

CRR Pertain to Capital Redemption Reserve fund which is created to secure the creditor & also it is mandatory to create while making the buy back of Share capital,b'coz after buy back the share capital reduce by such amount.(means the owner has paid before the liability being pay of the outsider & this give unsecurity to Creditor, that why it is mandatory to create the same with nominal value of share...)

CRR can be used for as per the Act for Instance... Issue of Bonus share,some extend to the payment of Dividend after approval from Central Government.

DRR is to be created for the payment security of Debenture only.

rakesh kalani (Article assistant) (88 Points)
Replied 29 August 2008

CRR is created just to maintain the capital base of the company.

cooldubai (Article) (31 Points)
Replied 17 August 2010

its highly unappropiate to ask but here's it, as said earlier in this thread that CRR is created to secure the confidence of creditors in that particular company, then where all can the CRR be used furthur, can it be used for issue of preference shares, or something like 'Premium on Redemption of Pref. Shares Fund' at the time issue of the same, similar to the issue of debentures.

CA Tejas Andharia (CA.) (2351 Points)
Replied 04 September 2010

Securities premium can also be utilised for buy back of shares. How? For debiting CRR and crediting Securities premium ? But doing this will be nullity as both Securities Premium and CRR can be used for issuing fully paid up bonus shares. Then why to do this?

My second question is proceeds of any shares or other specified securities can also be utilised for buy back? In which way? Which entry in books to be pass for this ?

Rajat agrawal (Student CA IPC / IPCC) (23 Points)
Replied 27 October 2012

can we use securities premium a/c to create crr..??

SHIVAM AGARWAL (NA) (34 Points)
Replied 02 February 2014

The capital of the company decreases with the redemption of preference shares. okay . comfortable. But how does a CRR secure a creditor? Is CRR an item of SHAREHOLDERS FUNDS? for whom is this amount set aside?

Raman Mudumbai (Article Student) (21 Points)
Replied 25 December 2014

Sir,

In case of Buy Back, it has been provided sec 69 of Compaines act,2013 that an amount equal to Nominal Value of Equity Shares bought back out of Free Reserves/Securities Premium shall be transffered to CRR. If 1000 shares whose Nominal Value of Rs10/- are to be bought back for an amonut of Rs50/- each. For the above purpose Machinery is sold out for Rs20000/- and the other amonut being required for Buy Back is utilised from the Free Reserves. Here the Nominal value of equity bought back is Rs 10000/-. But how to asertain how much amount is utilised from Free Reserves to buy back the Nominal portion, as there is scope of assuming that entire amount of Nominal value is bought back by sale of Machinery.

Please kindly Clarify.......

CA Tushar Dhingra (Practice ) (26 Points)
Replied 07 September 2016

Ok, here it is. We have to see the position of All Assets. eg. a company has Equity Sh. Capital of ₹5,00,000, Pref. Sh. Capital of ₹2,00,000, Free reserves of ₹6,00,000 and Creditors of ₹7,00,000 and the total of assets is ₹20,00,000. Now consider the security that creditors have before redemption of preference shares...if company decides to distribute full amount of free reserves as dividend to equity shareholders, the assets left will be ₹14,00,000 (20,00,000-₹6,00,000) and thus security of creditors is two times (14,00,000/7,00,000).

Now if preference shares are redeemed, assets will reduce to ₹18,00,000 and prefrence sh. capital will reduce to zero. Now security of creditors will be...12,00,000/7,00,000 i.e. less than two times. Now to maintain security of creditors, an amount equal to nominal capital of pref. sh. capital is transferred to crr (the purpose is to block free reserves so that the amount can't be used to distribute dividend). Now max. dividend can be 6,00,000-2,00,000=4,00,000 i.e the amount left in free reserves.

Now assets left if full free reserves are distributed as dividend...₹14,00,000 (₹18,00,000-₹4,00,000) and security of creditors is maintained at two times (14,00,000/7,00,000)

For any further queries, feel free to contact:

Regards

CA Tushar Dhingra

M. 9587113456

Email: catushardhingra @ gmail.com

1 Like