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arpit goyal

arpit goyal (Querist)
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01 June 2016 why should company make capital redemption reserve

Jatin Bajaj

Jatin Bajaj (Expert)
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01 June 2016 Usually when Company starts up the business they purchase assets and carry on the business. so first of all they pay lenders and then owners. N when the Company is going to be dissolved, first of all lenders are paid and if any profit is then distributed to owners. So when Company reedem or buy back shares, Company need to restore its capital either by fresh issue of Shares or by creating reserve called capital Redemption reserves and all the funds are transfered to such reserves. These reserve amount is converted into share capital. Thus amount in CRR is utilised to issue fully paid bonus to members of Company. So this is the reason that owners remain invested in business and they are not paid before lenders are satisfied.

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