To_the_point (IPCC NOV 10) (125 Points)
19 July 2010
Please clarify a conceptual doubt.
A company is required to create CRR equal to the nominal value of bought back shares less sale proceeds of the freshly issued instruments .
Please explain what is the justification behind this provision ?
Thankfully...
Kapil
(ds)
(92 Points)
Replied 19 July 2010
Hi thr...
It is statutory requirement under Companies act, 1956 that, in case of buy back of equity shares thr is reduction in Equity Capital (owners capital) which in turn reduces the liability of the owners of the co. and subsequently in case of liquidation or bankcrupcy increases the risk of non equity long term money lenders and other related stake holders not being able to get thr money back. For safeguarding thr interest, it is the obligation of the co. to transfer equivalent amount of its free reserves to CRR (which inturn cannot be distributed as dividend) or infuse the same amount of equity in the form of fresh issue, right issue etc which will nullify the effect on increse in risk due to buyback on the outside money lenders as explained above.
Hope that above xplanation helps you...
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