Issues for consideration
The capital reduction of retained earnings and reserves set in accordance with the company’s
statement of financial position carries tax payment duties for shareholders who receive it
accordingly.
The company must inform its creditors in writing about the upcoming capital reduction.
Creditors have the right to object to the reduction within two months from the notification date.
Capital Reduction
Capital Reduction
Capital Reduction
Benefits of capital reduction
Reducing a company’s
capital is…
Company
A way to reduce its paid-up
capital by either one of two
methods, as follows:
TIPS
If creditors object to the capital reduction, the company may negotiate and repay them in order
to proceed with the plan.
“The company reduced capital by reducing the number of shares on August 3,
2010 in order to wipe out the deficit in retained earnings that was incurred during normal
business undertakings. The company did not need capital reduction, but with the deficit in
retained earnings, the company was not able to pay dividends despite the fact that the company
hadnet profit earnings.
Thus, reducing capital to offset the deficit in retained earnings was a proper option that
did not affect the company’s financial status. It positively impacted shareholders by giving
them the chance to receive dividends or even capital gains from share price movement”.
Mr. Polpat Karnasuta,
President,
Nawarat Patanakarn Pcl., (NWR)
To support future dividend payments if the company is
experiencing accumulated loss. Capital reduction will
compensate for a deficit in retained earnings allowing the
firm to pay dividends without waiting for current operating
results.
1) Reducing par value
2) Reducing the number
of shares
To support capital increases by new investors
To encourage efficiency of capital usage, which consequently
improves financial ratios (e.g., ROE, ROA, total asset
turnover) and increases the company’s attractiveness among
investors.
Shareholders
To have more opportunities to receive dividend payments
if the company is experiencing a deficit in retained earnings.
Relevant notifications
- The Public Limited Company
Act B.E.2535, Section 139-144
- Civil and Commercial Law,
Section 1224-1228
www.set.or.th
>> Regulation
>> Regulation by Subject
Capital reduction to support future dividend payments
If a company has a deficit in retained earnings, laws prohibit
it from paying dividends. The company may reduce its capital
and use the funds obtained to offset the deficit in retained
earnings. The company will consequently be able to pay dividends
because (a) its retained earnings become positive and (b) the
company’s statutory reserves are allocated and reserved in
accordance with regulatory requirements.
>> Disclosure
joins with
CIMB Securities (Thailand) Co., Ltd.
62 The Stock Exchange of Thailand Building, Ratchadapisek road, Klongtoey, Bangkok 10110
Listed Company Development Department, The Stock Exchange of Thailand
Capital Reduction
Capital Reduction
Capital reduction procedures
Reducing capital to support a capital increase by new investors
A company may foresee a business opportunity that it is unable to take advantage of because
it has been experiencing accumulated losses. If the firm wants to raise funds, it can reduce its
capital so that its capital level truly reflects the past loss. Thus, new investors will be able to
inject funds at a price that properly reflects the firm’s value.
The board of directors resolves to reduce capital.
At least 14 days
Report to SET within the date on which the
board resolves to reduce capital or within
9 a.m. of the next business day.
Record date is set*
Reducing capital to offset
a deficit in retained earnings
Within 2 months
Reducing capital to encourage using capital more efficiently and thus
improve financial ratios, e.g., ROE, ROA, or total asset turnover
If the company has a large amount of excess cash and does not need to use aforementioned funds
in the near future, the firm may reduce capital to return the excess funds to shareholders.
Examples are as follows:
Shareholders’ meeting resolves to reduce capital
(voting > 75% of attending shareholders
with voting rights)
Within 14 days
Cash
800
Liabilities
Other assets 400
Paid-up capital
Statement of financial position –
After capital reduction of THB800 million
200
1,000
Retained earnings
Cash
0
Other assets 400
Reduce paid-up capital only
(Reducing capital to lower than ¼ of total capital is not permitted.)
Paid-up capital
200
(1,000-800)
0
End of period for objections from creditors
Reducing capital by
reducing par value
Reducing capital by
reducing number of shares
Within 14 days
Shareholders’ equity 200
Board of directors resolves to
set share register book closing date
Liabilities and
Liabilities and
shareholders’ equity 1,200
200
Retained earnings
0
Shareholders’ equity 1,000
Total assets 1,200
Liabilities
Total assets 400
shareholders’ equity
(Capital can be reduced to lower than ¼ of total capital)
Reducing capital to return
excess funds to shareholders
The company informs creditors of
the meeting’s resolution in writing.
Within 2 months
Statement of financial position
– Before capital reduction
Capital reduction sequence is as follows:
Other reserves >> Legal and Reserves >> premium on
share capital >> Paid-up capital
400
Posting SP, XN signs
Example: If net profit = THB20 million per annum, Return on Equity (ROE) and Debt/Equity
(D/E) ratios can be shown as follows:
Ratio
Return on Equity
Debt/Equity
Before
capital reduction
After
capital reduction
2.0%
10.0%
0.2 times
1.0 time
Here, the company has THB800 million in cash and anticipates no need to use it. If it
reduces capital, its ROE will be improved, while its D/E ratio will remain low.
3 business days
Shares register book closing date
for collecting shareholder names
Registering changed registered capital
with the Ministry of Commerce
Within 3 business days
Reporting to SET about registering capital reduction
Commencing stock trading with
the new registered capital
Remark * The record date is when the company determines the list of shareholders eligible to receive particular rights.
The share register book closing date must be the following business day.
Listed Company Development Department
The Stock Exchange of Thailand