Tranfer of amount paid on redemption of preference shares to CRR

When a company issues preference shares, it is required to maintain a certain percentage of its nominal value as a reserve, known as the Capital Redemption Reserve (CRR). The CRR is created to ensure that the company has sufficient funds to redeem its preference shares when they become due for redemption.

When a company redeems its preference shares, it can use the proceeds of a fresh issue of shares or from its reserves. However, if the company uses the proceeds from its reserves, it is required to transfer an amount equivalent to the face value of the preference shares being redeemed less the proceeds from the fresh issue to the CRR.

The reason for this transfer is to maintain the CRR at the required level, as it is a statutory requirement. By transferring an amount equivalent to the face value of the redeemed preference shares, the company ensures that it has sufficient funds in the CRR to redeem its preference shares in the future, if necessary. This transfer also helps to maintain the financial stability of the company and its ability to meet its obligations to its investors.