When is Capital Redemption Reserve Used?
1. Bonus Issue: The capital redemption reserve account is used by the companies in issuing fully paid-up bonus shares to its existing members. Bonus shares are those shares, which a company issues to its existing members free of cost.
2. Redemption of Shares: The main purpose of the CRR is to provide funds for the company during the redemption of its shares. This reserve safeguards the reduction of the company’s share capital.
3. Capital Reconstruction: Capital reconstruction happens when there is a change in the share capital of the company. The CRR can be utilized to ease this process. It can be used for the conversion of shares from one class to another or to change the nominal value of shares.
4. Balancing of Capital Losses: If a company incurs capital losses, it can utilize the CRR to balance these losses. It helps in protecting the shareholders’ investments and ensures the financial stability of the company.
5. Source of Fund: It is an account that holds the amount equivalent to the reduction in share capital. If at any time the company decides to finance the share buyback through its profits or reserves, the capital redemption reserve serves as a source of funds.