Capital Reduction And Cash Distribution

What is Capital Reduction and Cash Distribution?

Capital Reduction and Cash Distribution (also known as Return of Capital) is a return of a portion of the company’s paid-up share capital contributed by the shareholders back to the shareholders unlike regular dividend payouts which are drawn from the company’s current year profits or accumulated retained earnings over the years. Simply put, it constitutes a transfer of capital from the company back to the investors.

Subject to the approval of the shareholders and the High Court of the Republic of Singapore, a Capital Reduction exercise may or may not result in a cancellation of Shares or a change in the number of Shares held by Shareholders though par value (where applicable) of each share will be reduced correspondingly while each shareholder maintains the same proportionate shareholding in the company.

Companies look to reduce the company’s share capital and make capital distributions to shareholders for the following reasons:

  • To return cash surplus to shareholders in excess of the immediate requirements of the Company, thus enhancing shareholders’ value though an improved Return On Equity (“ROE”)
  • To achieve a more efficient capital structure

How do Capital Reduction and Cash Distributions work?

Source: ShareInvestor.com

The basis at which the stock is trading will be shown together with the stock’s trading data
at www.ShareInvestor.com whenever the company declares any entitlement.

After the announcement on the Capital Reduction and Cash Distributions, the shares will be trading on a “cum-entitlement” basis as denoted by “CE” symbol as reflected beside the stock counter. As long as an investor owns the shares on the last day when it is trading on “CE” basis, the shareholder will be eligible to receive the Cash Distribution pursuant to the Capital Reduction as declared by the company. Once the shares trade on “ex- entitlement” basis as denoted by “XE” symbol, an investor who purchases the shares will no longer be eligible to receive the Cash Distribution following the Capital Reduction as declared by the company.

Source: ShareInvestor.com

The details of the dividend entitlement are made available
under the Events Calendar section of the Factsheet at www.ShareInvestor.com.

Declaration Date (Also known as the Announcement Date)

The date on which the board of directors declares or announces the Capital Reduction and Cash Distribution.

Last Cum Date [Tth Trading Day]

The last trading day preceding the Ex-Date whereby the stock counter is trading with the Cash Distribution entitlement attached to it pursuant to the Capital Reduction.

Ex-Date

The date starting which the stock counter trades ex-entitlement, that is, without the previously declared Cash Distribution entitlement following the Capital Reduction attached to it.

Record Date (Also known as the Books Closure Date) [T+3th Trading Day]

The date as at the close of the business on which the securities accounts of shareholders must be credited with the company’s shares in order to be entitled to receive the Cash Distribution declared by the company.

Payment Date

The date on which the company pays the shareholders the Cash Distribution.

Example

Transpac announced an S$0.57 Cash Distribution per ordinary share with Ex-Date: 09/06/2011 and Books Closure Date: 13/06/2011.

For every Transpac share Mr. Z purchased before the Ex-Date and own till the Books Closure Date, he will be entitled to S$0.57 Cash Distribution per ordinary share which is funded from the company’s surplus cash reserves pursuant to a reduction in the company’s share capital.

On the Ex-Date, the market will typically adjust the share price downward by the amount of the Cash Distribution to take into account the transfer of funds out of the company.

The Market Value per Share trading on ex-entitlement basis, also known as the Theoretical Ex-Entitlement Price can be derived as follows:

Theoretical Ex-Entitlement Price
(A theoretical price which does not take into account other corporate or market factors)

= (Closing Price Per Share* – Cash Distribution Per Share) x Closing Price Per Share*
                            Closing Price Per Share*

= (S$ 2.38 – S$0.57) x S$ 2.38
S$ 2.38

= S$1.81 per Share on Ex-Date

* Refers to Closing Price Per Share on Last Cum Date.

Effects of Capital Reduction and Cash Distribution on Historical Price Data and Financial Ratios

Source: ShareInvestor.com

The Daily Historical as well as Intraday Price Data for all stock counters are available
for full download
under the Price Download section at http://www.shareinvestor.com/.

As explained above, corporate actions such as Capital Reduction and Cash Distribution have an effect on the share price when it trades on ex-entitlement basis following the conclusion of the corporate action. This was due to the return of funds to shareholders which were once assets to the company as reflected in the share price. Hence, price adjustment on historical data prior to the Ex-Date will be applied at the close of market trading on the Last Cum Date. The purpose of the historical price adjustment is to allow for comparison between prices before the Ex-Date and after the Cum Dates.

With the decline in Shareholders’ Funds due to the return of the Cash Distribution to Shareholders, it will bring about a fall in Net Asset Value Per Share (Shareholders’ Equity / Number of Shares in Issue) and an improved Return on Equity (Net Profits Attributable to Shareholders / Shareholders’ Equity) as well as a more optimised Gearing (Total Borrowings / Shareholders’ Equity).