Capital Reduction

Capital Reduction

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.
Capital Reduction
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. Reducing a company’s Benefits of capital reduction
capital is…
Company
A way to reduce its paid-up To support future dividend payments if the company is
capital by either one of two
TIPS experiencing accumulated loss. Capital reduction will
compensate for a deficit in retained earnings allowing the
methods, as follows:
firm to pay dividends without waiting for current operating
If creditors object to the capital reduction, the company may negotiate and repay them in order 1) Reducing par value results.
to proceed with the plan.
2) Reducing the number
To support capital increases by new investors
of shares
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.
“The company reduced capital by reducing the number of shares on August 3, Shareholders
2010 in order to wipe out the deficit in retained earnings that was incurred during normal
To have more opportunities to receive dividend payments
business undertakings. The company did not need capital reduction, but with the deficit in
if the company is experiencing a deficit in retained earnings.
retained earnings, the company was not able to pay dividends despite the fact that the company Relevant notifications
hadnet profit earnings.
- The Public Limited Company Capital reduction to support future dividend payments
Thus, reducing capital to offset the deficit in retained earnings was a proper option that
Act B.E.2535, Section 139-144
did not affect the company’s financial status. It positively impacted shareholders by giving
- Civil and Commercial Law, If a company has a deficit in retained earnings, laws prohibit
them the chance to receive dividends or even capital gains from share price movement”. it from paying dividends. The company may reduce its capital
Section 1224-1228
Mr. Polpat Karnasuta, and use the funds obtained to offset the deficit in retained
President, earnings. The company will consequently be able to pay dividends
www.set.or.th
because (a) its retained earnings become positive and (b) the
Nawarat Patanakarn Pcl., (NWR)
>> Regulation company’s statutory reserves are allocated and reserved in
>> Regulation by Subject 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
Reducing capital to support a capital increase by new investors Capital reduction procedures
Report to SET within the date on which the
The board of directors resolves to reduce capital.
A company may foresee a business opportunity that it is unable to take advantage of because board resolves to reduce capital or within
it has been experiencing accumulated losses. If the firm wants to raise funds, it can reduce its 9 a.m. of the next business day.
At least 14 days
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. Record date is set* Reducing capital to offset
a deficit in retained earnings
Within 2 months
Capital reduction sequence is as follows:
Reducing capital to encourage using capital more efficiently and thus Shareholders’ meeting resolves to reduce capital Other reserves >> Legal and Reserves >> premium on
(voting > 75% of attending shareholders share capital >> Paid-up capital
improve financial ratios, e.g., ROE, ROA, or total asset turnover with voting rights) (Capital can be reduced to lower than ¼ of total capital)

If the company has a large amount of excess cash and does not need to use aforementioned funds Within 14 days
Reducing capital to return
in the near future, the firm may reduce capital to return the excess funds to shareholders. The company informs creditors of excess funds to shareholders
Examples are as follows: the meeting’s resolution in writing. Reduce paid-up capital only
(Reducing capital to lower than ¼ of total capital is not permitted.)
Within 2 months
Statement of financial position Statement of financial position –
– Before capital reduction After capital reduction of THB800 million End of period for objections from creditors

Cash 800 Liabilities 200 Cash 0 Liabilities 200

Other assets 400 Paid-up capital 1,000 Other assets 400 Paid-up capital 200 (1,000-800) Reducing capital by Reducing capital by
Retained earnings 0 Retained earnings 0 reducing par value reducing number of shares

Shareholders’ equity 1,000 Shareholders’ equity 200 Within 14 days

Board of directors resolves to

set share register book closing date
Liabilities and Liabilities and
Total assets 1,200 shareholders’ equity 1,200 Total assets 400 shareholders’ equity 400
Posting SP, XN signs

Example: If net profit = THB20 million per annum, Return on Equity (ROE) and Debt/Equity 3 business days

(D/E) ratios can be shown as follows:

Shares register book closing date
for collecting shareholder names
Ratio Before After
capital reduction capital reduction
Registering changed registered capital
Return on Equity 2.0% 10.0% with the Ministry of Commerce
Debt/Equity 0.2 times 1.0 time Within 3 business days

Reporting to SET about registering capital reduction

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.
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