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Reconstructing Corporate Capital Structure

Globalization of business, revolution of Information and Communication Technology (ICT), changing in Govt. regulations, impact of prices and fluctuation in foreign currencies rates, requirement of funding for business expansion, all these factors compelling the corporate world to change and reconstruct their capital structure.

Companies often change capital structure by issuing new shares through Initial Public Offer (IPO) usually with Bank's joint venture. Shares sometime issue on discount, means below face value, or by purchasing of its own shares from stock market.

PakistanAmalgamation is one of the common technique for alteration of capital structure. It is a process in which two companies combines together and form new company with new funding, new resources for expansion of business. Both companies (Amalgamating and Amalgamated) assets and liabilities are revalued and restated in order to represent true financial position. The reason for amalgamation may be to expand business horizon, to increase sales volume, to avail legal advantages, to get technological monopoly and new motivated employees with innovative strategic vision toward corporate objectives.

Capital reconstruction is sometime made in adverse situations, like when business is in loss trap, or business own less and owe more, or when revenue of the business going to decrease, market price of share closing down, at that time Reduction in Capital is advisable for companies limited by shares. Capital reconstruction through reduction in capital means that shares will issue on discount (Rs.10 @ Rs.7). Reduction in capital may have impact on shareholders, so for shareholders' interest companies have to taken permission from apex corporate law authority like in Pakistan from SECP. Reduction in capital is helpful for paying liabilities against bank debts, debentures etc.

Capital reconstruction may also be done by issuing shares on premium, means issuing of share with face value Rs.10 @ Rs.15. Growing business can do that, the logic behind is that shareholders always purchase those shares that have good performance, so when the business is flourishing, it can issues shares on premium. According to law, companies have to make against amount received on premium 'Shares Premium Accounts'. This amount can be adjusted against Preliminary expenses, paying premium on redemption of redeemable capital like preference shares etc., and remain separate from other accounts.

So, Amalgamation, Reduction in capital and Issuance of shares at premium is very common for reconstructing corporate capital structure but it needs great care and expertise. The most competent professionals Like CFAs, ACCAs and Management Accountants are hired for that purposes.If there made any mistake in decision making it may lead to growing business into death-trap.

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