Why crr is created?

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sajjan ropiya (Querist)
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27 February 2013 CRR IS CREATED AT THE TIME OF REDEMPTION OF PREF. SHARES OR BUYBACK OF EQUITY SHARES WHEN BOTH TRANSACTION ARE SETTLED IN CASH. WHAT IS ACCOUNTING PURPOSE TO CREATE THIS CRR REMINEDERING THE VIEWS LAID DOWN U/S 77A OF COMPANIES ACT 1956 & OTHER APPLICABLE PROVISION. AND AS AT THE END THIS CRR IS ADJUSTED WITH REVENUE RESERVES. SO WHAT'S THE REASON BEYOND IT?

CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)
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27 February 2013 The preference shareholders are owners in the company and when we repay preference share capital, the exposure of creditors increases.

e.g. If total Liabilities is - 20 (Eq), 20(Pref), 40(Reserves), 20 (Creditors).

The exposure of creditors is 20 and owners is 40. Free reserves can be used to pay dividends to the shareholders (subject to certain conditions)

Now if Preference shares is redeemed, the exposure of creditors stand at 20 and Owners is reduced to 20.

The amount of redemption (Face value) is transfered to CRR to ensure that the amount redeemed remains blocked in the books. And the same would not be diluted by company by way of dividend as the same can be used to issue shares to shareholders.

This is my understanding of CRR.

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