Explain with a suitable example what is the rationale behind the creation of CRR or making fresh
issue of shares for redemption of preference shares?
Answers
Answer:
A limited company may issue redeemable preference shares if it’s Articles of Association provide. Thus, these preference shares are liable for redemption within a period not exceeding twenty years from the date of issue. A company cannot issue irredeemable preference shares. Also, a company can redeem only fully paid-up preference shares out of the profits available for dividend or out of the proceeds of a fresh issue of shares for redemption. Hence, the preference shares are redeemed from the capital reserve account created for the purpose of the redemption.
Explanation:
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Creation of Capital redemption reserves:
When the company proposes to redeem the preference shares out of the profits, it transfers an amount equal to the nominal value of the redeemable preference shares to the Capital Redemption Reserve A/c out of the profits of the company.
Also, in this case, the provisions relating to the reduction of share capital shall apply. The company can also use the Capital Redemption Reserve to issue the fully paid-up bonus shares.
The Redeemable Preference Share Capital is equal to the amount in Capital Redemption Reserve A/c and the new Share Capital A/c
Issues of fresh shares for redemption
Yes, it's another option to use redemption of shares.
While raising capital by issue fresh shares . Create reserve for redemption of preference share.
A company may redeem the redeemable preference shares out of the proceeds from a fresh issue of shares. In this case, firstly the company needs to pass the entries regarding the fresh issue and then that regarding the redemption.
Thus, in this case, the new Equity or Preference Share Capital A/c shall be equal to the nominal value of the Redeemable Preference Shares.