The return of capital event, happens when the company returns portion of the money, received from the shareholders.
Yes, this is indeed possible, and a lots of companies are doing it.
Reason for the return of capital
Above all, as we previously mentioned in the Dividend post, you company is trying its best, to keep the shareholders happy. Rather than distributing profits money, the company can distribute a portion of the money, received from the shareholders, in the case it does really needs them for the moment.
Follow the money
If you remember what we explained in the IPO event, when the company issues new shares, and the shareholders pay for them. We had two sections: The “Par value” and the “Issue premium“. Here is the illustration with the new info added:
The company would specify, the source of the money, in the event source document. There fore, if you see that the money is coming from the issue premium account, you can conclude that, the event is a Return of capital.
You can also have a case where the money comes from the “Merger” or “Contribution” accounts.
- Merger account: Is an account where funds came from the social capital or capitalized assets during a merger event
- Contribution: Is an account holding funds coming from the capitalization of assets contributed by a shareholder or a group of shareholders. You need to keep in mind that new investors, can bring cash or they can also bring assets. Such as Cars, Hardware or Real estate
Here is an illustration describing the capitalization of funds or assets coming from new investors:
Confusion with Dividend
Yes, it happens. I have seen a load of situations where the company is declaring a dividend from the “Issue premium” account. Not sure exactly, but probably to benefit from the hip, that comes with the dividend event.
So pay attention, to the source of the money. Only profits are considered a dividend distribution.
The key details to extract from this event would be:
- Rate: Amount paid back to the shareholders
- Source of the funds: To confirm the event validation
For more details about the dates mentioned above, please check the dividend post.