This article throws light upon the ten main reasons necessitating change in capitalisation. The reasons are: 1. To Restore Balance in the Financial Plan 2. To Simplify the Capital Structure 3. To Suit Investor’s Needs 4. To fund Current Liabilities 5. To Write off the Deficit 6. To Capitalize Retained Earnings 7. To Clear Default on Fixed Cost Securities 8. To Fund Accumulated Dividend and Others.
Reason # 1. To Restore Balance in the Financial Plan:
If the financial structure of a company has become top heavy with fixed cost bearing securities resulting into a great strain on the financial position of the company, the company may readjust its capital structure by redeeming the preference shares or debentures out of the proceeds of new issue of equity shares. This will lead to easing out the tension or reduce the strain and restore the balance in the financial plan.
Reason # 2. To Simplify the Capital Structure:
When a company has issued a variety of securities at different points of time to raise funds at difficult terms, it may need to consolidate such securities to simplify the financial plan as and when the market conditions are favourable.
Reason # 3. To Suit Investor’s Needs:
A company may have to change capitalisation to suit the needs of its investors. The companies, often, resort to split up of its shares to make these more attractive especially when the market activity in the company’s shares is limited due to high face value and wide fluctuations in its market prices.
Reason # 4. To fund Current Liabilities:
Sometimes, the companies feel that they need working capital on permanent basis. In such circumstances, the companies would prefer to convert their short-term obligations into long-term by taking advantage of favourable market conditions.
Reason # 5. To Write off the Deficit:
In case a company has not been doing well and book value of its assets is over-valued as compared to their real worth or when there are accumulated losses, it is better for the company to reorganise its capital by reducing book value of its liabilities and assets to their real values.
Such reorganisation is also necessitated, because, otherwise the company cannot legally pay dividends to its shareholders even in future when it makes profits without writing off the losses.
Reason # 6. To Capitalise Retained Earnings:
Changes in capitalisation may take place due to capitalisation of retained earnings by the issue of bonus shares. To avoid over-capitalisation, maintain a balance between preference shares and equity shares, and equity shares and debentures; a company may prefer to issue bonus shares out of its accumulated profits and resources without affecting their liquidity.
Reason # 7. To Clear Default on Fixed Cost Securities:
When a company is not in a position to pay interest on debentures or repay the debentures on their maturity, it may be forced to offer them certain securities (equity shares, Preference shares or new debentures) to clear the default resulting into a change in the capitalisation of the company.
Reason # 8. To Fund Accumulated Dividend:
If a company has not been able to pay fixed dividends to its preference shareholders and the same have been accumulating or when preference shares are due for redemption and the company does not have necessary funds to pay for the same, the company may prefer to issue new shares in lieu thereof resulting in a change in its capitalisation.
Reason # 9. To Facilitate Merger and Expansion:
In the same manner, to a facilitate merger and expansion; the intending companies may be required to readjust capital structure. Such a change is generally required to equate the shares of different companies.
Reason # 10. To Meet Legal Requirements:
Changes in capitalisation may also be necessitated to meet the changes in various legal requirements as and when those take place.