rainmaker & mono

@ haputantri NAV is equity divided by total number of shares. Equity includes all possible profits from unrealised share gains, bonds, land plus accumulated profits and the capital that shareholders invested to begin and throughout with the company aka stated capital.

When you start a company like XYZ bank you need to put some money in. That is stated capital. You use that to acquire assets and losses go to retained losses. Then you have to offset losses by getting more money ... Rights. This increases your stated capital.

Then you make more losses so now you cannot raise money. So you offset all the losses by reducing stated capital. When you do this your shares are cancelled in proportion. Have you seen disclosure about reduction in stated capital?

Very rare but i have seen it. After you have less stated capital your customers are not secure because the next major loss wipes out all the equity.

So CB and other banks you borrow from get upset. They ask for a major capital injection and you talk about your land value. CB tells you off put some cash. So the big cash guy comes (if comes) and says I want a 95% stake because I'm bailing you out .... Like JP Morgan Merrill Lynch deal.

very interesting discussion

you can refresh your knowledge

What is in a name Mono or Rainmaker,Salt or pepper

Rainmaker,

Give some examples of companies recently that did " shares cancelled in proportion" after reduction in stated capital. If they do that is is serous.

I remember for example SEMB did a reduction of stated capital but they did no such thing to cancel shares. If they did that seriously affect holders.

slstock wrote:Rainmaker,

Give some examples of companies recently that did " shares cancelled in proportion" after reduction in stated capital. If they do that is is serous.

I remember for example SEMB did a reduction of stated capital but they did no such thing to cancel shares. If they did that seriously affect holders.

Sometime back MBSL also did the capital reduction, but am not sure what method they followed.

@slstock ..... there are two options available to a company as per section 59 of Companies Act. Cancel shares or accept a lower par value per share. Senanayake opted the second option but the share price drops with the second option.

With the first option the share price does not drop. Because the NAV is the same before and after. You cancel both equity (stated capital) and shares


From the web-----

http://www.wikinvest.com/stock/Peace_Arch_Entertainment_Group_%28PAE%29/Reduction_Stated_Capital


REDUCTION IN STATED CAPITAL

Section 34(1)(b)(ii) of the OBCA permits a corporation to reduce its stated capital in a share capital account for any purpose. The reduction in stated capital will be applied to reduce the deficit in the Company’s financial statements. The Corporation has accumulated a large deficit over the past few years, and the Directors have determined that it is in the best interests of the Corporation to reduce its stated capital account for the common shares, which will, reduce the need to carry forward and account for the deficit in the Company’s financial statements. This reduction in the stated capital account is being made in accordance with generally accepted accounting principals in the US and Canada. Holders of common shares the Corporation will be asked to consider and approve at the Special Meeting the Special Resolution as set out in Appendix B to this Circular (requiring approval by a majority of not less than two-thirds of the votes cast by shareholders who vote, in person or by proxy, on the special resolution) to authorize the directors to reduce the Corporation’s stated capital account for its common shares by up to $29,706,623, or such lesser amount as may be determined by the directors of the Company, which represents all or a portion of the accumulated deficit of the Corporation at September 1, 2004.

rainmaker wrote:@slstock ..... there are two options available to a company as per section 59 of Companies Act. Cancel shares or accept a lower par value per share. Senanayake opted the second option but the share price drops with the second option.

Once again the book may be slightly outdated.

SEMB and CSEC reduced stated capital by writing off stated capital against retained losses. I'm not an expert on companies act but the new Companies Act obviously seems to allow SEMB/CSEC to reduce stated capital without reducing issued shares.

Yes but what company in Sri Lanka cancelled shares. That is serious to the holder. Thats why I am asking for an example. If this does not happen now then we do not have to worry people about loosing partly shares they hold during a reduction of stated capital.

rainmaker wrote:@slstock ..... there are two options available to a company as per section 59 of Companies Act. Cancel shares or accept a lower par value per share. Senanayake opted the second option but the share price drops with the second option.

With the first option the share price does not drop. Because the NAV is the same before and after. You cancel both equity (stated capital) and shares


From the web-----

http://www.wikinvest.com/stock/Peace_Arch_Entertainment_Group_%28PAE%29/Reduction_Stated_Capital


REDUCTION IN STATED CAPITAL

Section 34(1)(b)(ii) of the OBCA permits a corporation to reduce its stated capital in a share capital account for any purpose. The reduction in stated capital will be applied to reduce the deficit in the Company’s financial statements. The Corporation has accumulated a large deficit over the past few years, and the Directors have determined that it is in the best interests of the Corporation to reduce its stated capital account for the common shares, which will, reduce the need to carry forward and account for the deficit in the Company’s financial statements. This reduction in the stated capital account is being made in accordance with generally accepted accounting principals in the US and Canada. Holders of common shares the Corporation will be asked to consider and approve at the Special Meeting the Special Resolution as set out in Appendix B to this Circular (requiring approval by a majority of not less than two-thirds of the votes cast by shareholders who vote, in person or by proxy, on the special resolution) to authorize the directors to reduce the Corporation’s stated capital account for its common shares by up to $29,706,623, or such lesser amount as may be determined by the directors of the Company, which represents all or a portion of the accumulated deficit of the Corporation at September 1, 2004.

rainmaker wrote:When profits are made they are transferred to the equity side of the balance sheet called retained earnings. Profits are also simultaneously transferred to Cash in the Current Asset side of the Balance Sheet. The company may have to transfer some of this share holder profit to stated capital as CB rules. Under Statutory Reserves .... In this case you capitalisation of reserves. Generally Capitalization of Reserves is always from Capital Reserves that comes about from Revaluing Fixed Assets in non banking companies. i'm not sure about the BFI Sector . All stated capital is backed by shares. Proceeds from IPO go to stated capital. Stated capital is used to protect the customer from a shock impact or to provide a capital cushion if a large loss is materialised. In this case stated capital is reduced and shares are cancelled. If this happens how is a customer or shareholder protected ?

Not all retained earnings are cash but you will never reduce stated capital to pay dividends. So dividends are paid from profits during the period and retained earnings. The Amount of Dividends you pay is always a function of your Profitability and more importantly your Cash Flow which takes into account Capex. Retained Earnings or Revenue Reserves is never an indication of ability to pay Dividends. Retained Earnings is a score sheet of Earnings less Dividends throughout the history of the Company. A carried forward Loss will mean a Negative Revenue Reserve. You cannot use revaluation reserves or unrealised gains to pay dividends because they are not booked gains. So firms like TFC kept increasing their land values to have strong NAV becos they know the CSE way of thinking. A lot of those revaluation reserves were written off..... When you write off assets you must post it to P&L as a realised loss.

The New Accounting Rules which are Internationally accepted and followed state that you have to Mark To Market the Fair Value of All your Assets and Liabilities. Then a realistic NAV is arrived at. Now, if some Banks/ Companies take advantage of this by revaluing their assets to unrealistic levels to boost their equity, this does not mean that the NAV is not a useful ratio to figure out the Net Worth of a Company/ Bank.

Was Galadari Hotels thinking in those terms ?(cancellation of shares)

@Jiggy None of the above is outdated. If you use stated capital without cancelling shares you will reduce the Net Asset Value per share. This will affect the share price which is what it did. ..... Note that there were some eyebrows raised when Senanayake did this and Senthi (the major shareholder) agreed to this.


The most common option is to offset losses by reducing stated capital and cancelling shares.

And yes Galadari thought about this at one time instead of doing debt to equity swap.


@Alchemist, Stated Capital cannot be used to pay dividends. Fair value rules only impact the revaluation reserves (unrealised gains/losses). The point of the first post was in response to Jiggy questioning why I was referring the retained earnings instead of NAV. Both are important, but Retained Earnings is a good rule of thumb. I notice that some members quote NAV per share instead of questioning what it is composed of.

There is no point arguing which is more important. But for those who think stated capital can be used to pay dividends, you are wrong.

Let's now move onto something else

Yes now that you have stated your opinion on NAV constituents am sure people can make their own judgement. Thanks.


But I am askign again , which companies you know reduced stated capital and cacelled/reduced shares?

rainmaker wrote:

The most common option is to offset losses by reducing stated capital and cancelling shares.

We can change the post topic and continue further.

@slstock

This does not happen often as many firms raise capital.
But do you know what happened with ALUFAB?

http://forum.srilankaequity.com/t3474-aluf-inform-serious-loss-of-capital

rainmaker wrote:@Jiggy None of the above is outdated. If you use stated capital without cancelling shares you will reduce the Net Asset Value per share.

That's clearly wrong rainmain. If stated capital is reduced by setting off against retained losses there is no change to NAV.

Here's a hypothetical ex-
Before reduction in stated cap
Stated Cap 1,000
Retained Earnings/Losses (500)
NAV/Shareholder Funds 500

After reduction in stated cap by setting off against retained losses
Stated Cap 500
Retained Earnings/Losses 0
NAV/Shareholder Funds 500

No change to NAV, which what happened in the case of CSEC.

They did not cancel share as far as I recall.

rainmaker wrote:@slstock

This does not happen often as many firms raise capital.
But do you know what happened with ALUFAB?

http://forum.srilankaequity.com/t3474-aluf-inform-serious-loss-of-capital

Rainman with ALUF they just went for a rights issue.

See bottom of page one http://cse.lk/cmt/upload_report_file/689_1320745055593.pdf

No jilmart regarding reduction in number of shares issued. (Which the point that SLS keeps asking you)

Jiggysaurus wrote:

rainmaker wrote:@Jiggy None of the above is outdated. If you use stated capital without cancelling shares you will reduce the Net Asset Value per share.

That's clearly wrong rainmain. If stated capital is reduced by setting off against retained losses there is no change to NAV.

Here's a hypothetical ex-
Before reduction in stated cap
Stated Cap 1,000
Retained Earnings/Losses (500)
NAV/Shareholder Funds 500

After reduction in stated cap by setting off against retained losses
Stated Cap 500
Retained Earnings/Losses 0
NAV/Shareholder Funds 500

No change to NAV, which what happened in the case of CSEC.

Ok I didn't think of an example like the above. Either way the firm is stuffed if its in Banking & Insurance due to the stated capital requirements. ...... most firms in this problem fall into this category

Note that in the above example, you don't take into account that accumulated losses have eaten up liquid cash and that the firm after stated capital offset is worse off. It's better to raise capital.

I think REEF did reduce the number of shares.

UKboy wrote:I think REEF did reduce the number of shares. (for a while)

REEF was in the nature of a reverse subdivision which didn't change the absolute NAV (The NAV per share increased due to the number of shares reducing).

100 shares and NAV of 300 before reverse sub (NAVps of 3)

10 shares and NAV of 300 after reverese sub (NAVps of 30)

No cancellation of shares against stated capital as Rainmaker keeps mentioning

UKboy wrote:I think REEF did reduce the number of shares.

That was a Reverse Stock Split. They first made a Rs 10 Share to Rs 1 (under the old Par Value system) and then reserve split it 1 for 10 !

They did a consolidation . So nobody "lost" shares. If they held 10 shares then it became 1 . NAV also increased propotionately., After that rights and warrants issue.

UKboy wrote:I think REEF did reduce the number of shares.

slstock wrote:They did a consolidation . So nobody "lost" shares. If they held 10 shares then it became 1 . NAV also increased propotionately., After that rights and warrants issue.

UKboy wrote:I think REEF did reduce the number of shares.

What MBSL did sometime back 5 years so?

If am not mistaken my number of shares came down due to the capital reduction

Jiggysaurus wrote:

UKboy wrote:I think REEF did reduce the number of shares. (for a while)

REEF was in the nature of a reverse subdivision which didn't change the absolute NAV (The NAV per share increased due to the number of shares reducing).

100 shares and NAV of 300 before reverse sub (NAVps of 3)

10 shares and NAV of 300 after reverese sub (NAVps of 30)

No cancellation of shares against stated capital as Rainmaker keeps mentioning

Jiggy. Agree with you.

Gaja wrote:

What MBSL did sometime back 5 years so?

If am not mistaken my number of shares came down due to the capital reduction

Same reverse subdivision as REEF but on the old par value basis (this may be the old companies act book that rainmaker mentions)

MBSL reduced its Stated cap from 1.3 billion to 600 million since they were using the OLD par value method the number of shares came down. Someone having 1,300 shares would have ended up with 600 shares.

I think one or two companies did this sometimes ago . They cancelled main holders shares only. Minority dnt get affected. Hence no trouble came from minority.


By the way Rainmaker,

there is nothing called Par Value now . Comp act 2007 changed this concept. It is accepted worldwide now. So reducing par val is a thing in the past.

As there is no par value, share cancelling or reducing the number of shares is not necessary although it is not prohibited. They just can reduce the stated capital without changing the number of shares .

eg. csec / cfvf in 2009

I missed a lot? And totally confused.

I was of the view that stated capital or what ever portion of equity is basically an accounting jargon.

NAV = Total assets - Total liabilities, in other words equal to total equity.

This is in case a company liquidates, sells all the assets and pays off the liabilities, what is left belongs to the shareholders. In reality what is recorded on the book will not be what you get. Better to look at tangible NAV in case of companies with intangible assets and even discount timber stocks.

I have never heard of using retained earnings alone for any ratio calculation (maybe my bad if it really exists)

But anyhow, I am of the view, what ever the accounting entries companies do while, doing a capitalization for example is not going to make a difference to the shareholder wealth. In the case of paying dividend, there will be, due to the outflow of cash.

Thanks Rinmaker for your clarification & all who contributed. Its a useful discussion.

Even NAV or Retained earnings may give you wrong signals.
For me , I always look at the cash flow to see where the money has gone. I think they do not keep retained earnings at safe.

BTW, balance sheet and earnings tell you about the past and Cash flow hints you about the future.

Jiggysaurus wrote:

Gaja wrote:

What MBSL did sometime back 5 years so?

If am not mistaken my number of shares came down due to the capital reduction

Same reverse subdivision as REEF but on the old par value basis (this may be the old companies act book that rainmaker mentions)

MBSL reduced its Stated cap from 1.3 billion to 600 million since they were using the OLD par value method the number of shares came down. Someone having 1,300 shares would have ended up with 600 shares.

Related news
http://www.sundaytimes.lk/040815/ft/16.html
http://www.island.lk/2005/01/09/business10.html

May the following link give more ideas (with simple worked examples), If not excuse me for bothering.

https://www.icsaglobal.com/assets/files/pdfs/BusinessPractice_and_IQS_docs/studytexts/financialaccounting2/o_FinAcc_6thEd_StudyText_Chapter10.pdf