The Increase of Share Capital

Increasing the share capital is a common move employed by companies to raise funds for their business operations, expansion plans, or debt clearance. This is also a very common strategy used by companies when they feel the need to strengthen their financial base or expand their business activities. For instance, J.P. Morgan during the 1902 financial crisis, managed to raise additional capital through increased share capital as a measure to stabilize the banking industry.When a company decides to increase its share capital, it issues additional shares to existing shareholders or new investors. This offers the company the required liquidity without increasing its debt load.

Consequences of Increasing Share Capital

However, the increase in share capital doesn’t come without consequences. If the company chooses to issue additional shares, then the value of existing shares may potentially dilute. This is largely due to the increase in the number of shares, without a corresponding increase in company assets. Furthermore, the approval of shareholders in a general meeting is an essential pre-requisite for the increase in share capital.On the flip side, it can also provide investors with an investment opportunity. By purchasing additional shares, they increase their stake in the company. This can be especially advantageous if the company is poised for growth or is in line to secure a lucrative contract.

Reduction of Share Capital Cyprus: A Case Study

Consider the case of Cyprus, which faced economic turmoil in 2013. Many Cyprus companies had to resort to the reduction of share capital to maintain liquidity. However, the Cyprus Companies Law, Cap. 113 makes it clear that a company can reduce its share capital if it’s deemed expedient and beneficial to the company’s financial health.This reduction in share capital requires an application to the Cyprus court and is subject to certain statutory procedures to protect creditors and shareholders. Essentially, the reduction process entails diminishing the number of shares in circulation or lowering the nominal value of each share, which effectively reduces the company’s share capital.The reduction of share capital is a strategic tool for Cyprus companies to strengthen their financial position, repay debts, or return cash to shareholders. However, it requires strategic planning and professional guidance.

The Final Thoughts

In conclusion, share capital plays an influential role in a company’s financial structure, from its growth plans to its debt management. The decision to increase or decrease share capital should be carefully weighed. Understanding the concept of share capital, as well as the implications of its increase or decrease, is instrumental for businesses looking to optimize their financial performance in the local and global marketplace.