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Redemption of preference shares
Accountancy
We know there are 2 ways we can redeem preference shares (PS), one is by making fresh issue of shares and other is transferring divisible profits to CRR. All this to provide protection of creditors n outside liabilities. The question is, no doubt by fresh issue we can bring in money/funds (BCz it will increase bank balance) and then creditors can be assured that they can be paid from those funds later, if need arises (since redemption of PS would've decreased the bank funds) BUT in case we create CRR out of divisible profits, we are not introducing any additional funds/bringing any money into the company, rather we are just transferring from one reserve to another and asset side of balance sheet doesn't increase (funds doesn't increase in this case) then how can creditors feel assured/protected by creation of CRR? And even tho we created CRR, the bank bal.would've decreased on asset side. Also CRR can be used later just to issue bonus shares (ie. It increases capital ultimately), but bonus issue is optional, what if company never issues bonus out of CRR and let CRR remain same/maintained till eternity, how can creditors feel safe with CRR balance? Can CRR bal.be directly used to pay off creditors later during liquidation (so that they will feel secure with CRR balance too)
Answers (4)
Good question. Explained here https://youtu.be/xU1YYNfVoBQ?t=190 The amount in CRR cannot be used to distribute dividends to shareholders. Hence the money to that extent will remain within the company.
CA Suraj Lakhotia Admin
Good question. Explained here https://youtu.be/xU1YYNfVoBQ?t=190 The amount in CRR cannot be used to distribute dividends to shareholders. Hence the money to that extent will remain within the company.
Ok thank you sir. So that money of CRR remained in business, say is not used to issue bonus shares too (just lying in business) can be used later on to pay to creditors in case company goes into liquidation?
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