A company or business firm is said to be over capitalised when its earnings are not enough to yield a fair return on the amount of securities outstanding open the book value of its securities exceed the current value of its assets.
According to GestenBerg "A corperation is it over capitalised when it's running are not large enough to yield a fair return for the amount of securities outstanding exceed the current value of assets"
According to H. Gilbert "when a company has constantly been unable to earn the prevailing rate of return on its outstanding securities considering the earning of similar company in the same industry and the degree of risk involved) it is to be over capitalised."
it can be expressed as
over capitalisation = loan < equity capital.
causes of over capitalisation
- high promotion expenses
- wrong estimation of earning at the time of promotion.
- transfer of assets at inflated rates.
- formation of company during inflationary period.
- Excess capital flotation
- shortage of capital
- liberal Dividend policy
- defective depreciation policy
effects of over capitalisation
- Effect on company :- Difficult to obtaining capital from public.
- effect on shareholder :-reduction in the rate of dividend.
- effect on labourers :-Reduction in salary or other facilities provided to the workers
- effect on society:- increase in the price of a product or service fall down quality of the product.
remedial measures for over capitalisation
- reduction in funded Depts
- issue of share at discount
- reduction in the rate of interest on debenture
- reduction in the par value of the price
- redemption of high rate of dividend preference shares
- capitalisation of the profit
