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CS Professional · Corporate Restructuring, Valuation and Insolvency · Types of Corporate Restructuring

Mehta Textiles Ltd has accumulated losses of Rs 40 crore and a large share capital that is no longer represented by available assets. The board wants to write off the losses against paid-up capital by reducing the face value of shares, without paying anything back to shareholders. Which restructuring tool is this?

This is a capital reduction, a financial restructuring tool. Capital lost and not represented by assets is written off against share capital by reducing face value, with no payment to shareholders. Buy-back returns cash, demerger transfers a business, and bonus issue capitalises reserves.

  1. ABuy-back of shares out of free reserves
  2. BCapital reduction (financial restructuring) by writing off lost capitalCorrect
  3. CDemerger of an undertaking into a new company
  4. DIssue of bonus shares from securities premium

Explanation

Writing off accumulated losses against paid-up capital, with no cash returned, is a capital reduction used for financial restructuring. A buy-back returns cash to shareholders. A demerger transfers an undertaking, and bonus issue capitalises reserves, which increases rather than reduces capital.

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