Not able to understand why we create CRR when we buyback?
Its mentioned that when we buyback our capital base decreases so to maintain it we have to create CRR. But creation of CRR is only a transfer within reserves and surplus not an increase or decrease.
The purpose of the CRR is to ensure that companies maintain the capital base intact in the event of a capital diminution. A capital diminution refers to a depletion in the paid-up capital of a company. It can be caused when a company redeems preference capital or opts to undertake a buy-back scheme.
Purchase of own shares results in reduction of shareholder’s funds and In other words liability side of balance sheet. A company also needs to transfer certain amount to the nominal value of Equity Share in case of:
So, whenever a company will buy back its own share or redeem preference share they have to create CRR because the company have to maintain it’s reputation in the market because reduction of capital will have a negative effect on the company market value and It can lose it market value.
Company Law also prohibit reduction in share capital of the company (Exception are there). This is also a reason to create CRR and same is mentioned under companies act that whenever a company will buy back it’s own share and redeem preference share capital they need to create CRR.
There can be different other reason for that but I have told you as per my point of view and as per Companies Act.
Thank you I understood