BFIs and Insurance
capital requirements are rules that force a firm to maintain a minimum ratio of
capital to assets. The purpose is to ensure that BFIs and Insurance Companies are
able to sustain significant unexpected losses in the value of the assets they
hold while honourng withdrawals and other essential obligations. In the present
context, we have seen a mushrooming of banks, finance, micro-finance, insurance
and other financial institutions with no quality and good services. Government
of Nepal, Nepal Rastra Bank, Beema Samiti and concern bodies are now working on
formulation policies to control them. Central Bank has already unveiled its
monetary policy to increase its paid up capital significantly within the time
span of two years. Currently, some banks and financial institutions have merged
and some are in the process of merging. However, For the Insurance Company,
Beema Samiti has just prepared a draft to increase its Paid Up capital. Now the
draft about to increase paid up capital of life and non life insurance company
is being discussed in the concern bodies and still yet to finalize. According
to draft, insurance company must raise their paid up capital to 4 arab and 5
arab respectively within two years of time from the date of approval.
Ways
to Increase Paid-Up:
There are different
ways to increase paid up capital. Issuing right share, bonus share, FPOs and
IPOs are some ways to increase paid up capital. Issuing bonus share is the
direct transfer of the reserve and surplus of the BFIs and Insurance to the
paid up capital. Further public offering (FPOs) is also the method to raise
additional capital. Listed company can issue FPO to investors, which is one of
the viable options to increase paid up capital. Another option is issuing IPOs.
Merger or acquisition can be also the way of increasing paid up capital. Though
there will be some technical difficulties to settle institutional staffs if two
or more different level institution goes to merge but it can be the best option
for capital increment plan.
Issue
of Right Share:
Although there are different,
options to increase paid up capital but in this article, we are focusing on merits
and demerits of Rights Share Issuing. Rights Shares issue is one of the ways to
raise the capital. Right shares mean the shares where the existing shareholders
have the first right to subscribe the shares. Right shares are usually at the
discount as compared to the prevailing traded price in the market. The amount
of rights issue is usually at the proportion of existing holding.
In general, a company
may look to raise paid up capital for expansion its business or projects. In
some cases, if company is in trouble, it may issue rights shares to pay off debt
to maintain financial strain.
There are advantages
and disadvantages of issuing right shares.
Advantages
of rights issue:
- Controlling of the company is retained in the hands of existing shareholders.
- The rights issued to the shareholders have a value. Shareholders may trade the rights on the market same way they would trade ordinary shares.
- Troubled companies may get rid of debt by issuing right shares if they are unable to borrow more money.
- Rights issue shares are offered proportionately to the existing shareholders according to their existing holdings so that directors cannot misuse by issuing to their friends, relatives or any others as per their interest.
- There is more certainty of getting capital when fresh issue of shares is made to the existing shareholders than to the general public.
- Existing shareholders remain satisfied when rights issues are made time to time.
- The expenses to be incurred, if shares are offered to the general public, are avoided.
Disadvantages
of right issue:
- A right issue can offer a quick fix for a troubled balance sheet but it is not the ultimate solution to address underlying problems that weakened the balance sheet.
- The value of each share will be diluted as the result of the increased number of shares issued.
- One of the negative impacts of issuing rights shares is immediate fall in share price because of increased number of shares outstanding that dilutes the earning per share.
- Share dilution reduced the value of an individual investment and can drastically affect a portfolio.
- Company must bear flotation cost like fee of a merchant banker, brokerage, underwriting fee and other issue expenses.
- A right issue may affect the growth rate of the company and a high pressure generates to maintain it.
- A small-scale company may go in significant loss if company is unable to swell its business or not as much of prospect for expansion in current situation.
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