Expansion Reduction of Capital

An expansion of capital supposes a growth of the share capital of a company, being by issuing new shares or increasing the nominal value of the existing stock.

In a symmetric way to expansion of capital, a reduction of the same may also happen, diminishing it by means of the amortization of part of its shares or well by reducing the nominal value of the same.

When a company does a capital reduction followed by an increasing of the same, the process receives the common name of “accordion Operation”.

Generally, while the reduction of share capital has as an objective the settlement of accumulated losses, the posterior increase of capital tries to inject new funds to the company.

Types of Capital Expansion
In a Bonus shares expansion of capital at 60%, the proportion is of one new share is of $1,000 and the subscription of rights are quoted at $80. =, You must pay out the following for each new share:

An old shareholder that has four old shares will only have to pay out $400. = For the new share.

An investor that doesn’t have any cold shares will have to buy four rights ($320. =) from the company’s shareholders that are not interested in accessing to the expansion and having to pay $400. = To the issuing company, for which each new share will cost him $720. =.

Before an expansion of capital the old shareholders can opt between several alternatives:

Not to sell its subscription of rights and to access to the expansion of capital. Having passed the term of expansion, they acquire the new shares at the offered price, safe in the case that the expansion of capital is of bonus shares, in this case the obtain them for free.

Before this alternative, the investors don’t receive any economic rent but they maintain its relative participation on the market.

To sell their subscription rights obtaining an economic profit from the sale, with this option, he rejects the possibility of subscribing the new share that from the beginning would have correspond to them, and as a consequence, the investor looses certain importance at the company.

To sell part of its subscription rights and use the rest to buy some new shares.  This is usually done, when they don’t want to make any pay out but want to increase their portfolio.

This action is denominated as a “white operation”, with the profit obtained from the sale of part of the rights; they pay out the subscription of those shares corresponding to the rest of rights they still maintain.

When beginning an expansion (in the period of “rights subscription market” and during the approximate term of a month, all the companies that have done the operation will be quoted on two parallel markets:

  • That of old shares
  • And that of rights of subscription

The new shares usually have an inferior price than the old shares due that, until they level themselves, their economic rights are inferior.

For example, if an expansion has done at the middle of the year, its understandable that the new shares will receive a dividend in proportion to their lifetime. In this case, the new shares will receive half the dividends than the old ones. Also, the new shares have less liquidity due to the fewer amounts of them on the market.