4.
Explanation
Reserve capital refers to a portion of a company’s profits that is set aside and not distributed as dividends to shareholders. This capital is retained within the company for specific purposes, typically to ensure financial stability or to meet future contingencies. Reserve capital is usually classified into various
categories, such as statutory reserves, general reserves, or specific reserves, each with its own purpose and rules for utilization. It represents a company’s financial strength and its ability to adapt to changing circumstances while safeguarding the interests of shareholders and creditors. Reserve capital can serve various functions, including:
1. Financial Stability: It acts as a financial cushion to help the company weather economic downturns, unexpected expenses, or losses. This reserve can be tapped into to maintain operations during challenging times.
2. Business Expansion: Companies often retain earnings as reserve capital to fund future growth and expansion projects. This can include investments in new equipment, technology, or facilities.
3. Debt Repayment: Companies may use reserve capital to pay off debts or loans, reducing interest expenses and improving their financial health.
4. Compliance: In some jurisdictions, companies are required by law to set aside a portion of their profits as reserve capital to meet specific regulatory requirements or protect the interests of creditors and shareholders.
5. Dividend Stability: Reserve capital can help companies maintain a consistent dividend payout to shareholders even during less profitable periods.