What do you mean by alteration of share capital?
The alteration of share capital refers to the process of changing the total value of a company’s shares. This can involve various actions, such as increasing or decreasing the number of shares issued, changing the face value of the shares, or redistributing the shares among the shareholders. In this article, we will explore the different types of alterations that can occur and the reasons behind them.
Types of alterations of share capital
1. Increase in share capital
An increase in share capital occurs when a company decides to issue new shares to raise additional funds. This can be done by offering shares to existing shareholders on a pro-rata basis or by issuing new shares to new investors. An increase in share capital can be beneficial for a company, as it provides additional capital for expansion, investment, or debt repayment.
2. Decrease in share capital
A decrease in share capital happens when a company decides to reduce the number of shares in issue. This can be achieved by buying back and cancelling shares, or by consolidating shares (also known as a share split). A decrease in share capital may be necessary for a company that has overestimated its capital requirements or wishes to simplify its share structure.
3. Change in face value
The face value of a share represents the minimum price at which a share can be issued. A change in face value can be either an increase or a decrease. This alteration is often done to align the face value with the current market value of the shares or to adjust the capital structure of the company.
4. Redistribution of shares
A redistribution of shares involves changing the number of shares held by each shareholder. This can be done through a rights issue, where existing shareholders are offered additional shares at a discounted price, or by transferring shares from one shareholder to another. Redistribution of shares can be used to equalize the ownership of the company among its shareholders or to provide incentives for certain shareholders.
Reasons for altering share capital
1. Financial restructuring
A company may alter its share capital to restructure its finances, such as reducing debt levels or optimizing its capital structure. This can improve the company’s financial health and make it more attractive to investors.
2. Expansion and investment
By increasing its share capital, a company can raise additional funds to finance growth, such as expanding into new markets or acquiring other businesses. This can enhance the company’s competitive position and increase its market value.
3. Tax considerations
In some cases, altering share capital can be a tax-efficient way for a company to manage its tax liabilities. For example, a rights issue may allow a company to issue new shares at a discounted price, which can reduce its taxable income.
4. Simplification of share structure
A company may alter its share capital to simplify its share structure, making it easier for investors to understand and value the company. This can increase the liquidity of the shares and make the company more attractive to institutional investors.
In conclusion, the alteration of share capital is a complex process that can have significant implications for a company’s financial health and market value. Understanding the different types of alterations and their reasons can help companies make informed decisions about their share capital structure.
