Forums
Back
Buy back of shares
Accountancy
Video no 5 in lectures Sir said for source of buy back shares One of the option is using existing free resource. While using existing free resources creditors get upset because of equity shareholders capital (wall behind creditors )gets reduce. So sir said we make sure to SH gets upset and creditors gets happy by way of creating CRR which can only be used for the purpose of bonus issues and it prevent the free resources to pay in the form of dividend Now my questions is,by making CRR how the creditors gets back his support back (happiness) again which is only used for bonus issue. In short how making free resouces as capital redemption reserve gives support to creditors? Pls explain this iam geting confused about CRR
Answers (1)
Best Answer
A buy-back is a scheme by which a company repurchases a certain number of its outstanding shares usually at a price higher than the prevailing market price/ fair value of the shares. There are two sources for buy back - (1) fresh issue of shares or (ii) from existing resources (proceeds other than fresh issue) i.e free reserves The company, under section 69 of the Companies Act, is also obligated to create CRR to the extent of face value of shares bought back by utilising existing reserves (free reserves like Gen Reserve, P&L balance and securities premium) When you create CRR out of the free reserves, so much of the money will not be available for shareholders for declaration of dividend or further buy back, so by creating CRR company is restricted by utilising the existing resources from further depletion, so they will be available for company in case of any requirements of outsiders during insolvency or winding up
