The causes of over capitalisation

Over capitalisation of a concern is caused by the following reasons

(a) Over issue of capital:  Defective financial planning may lead to excessive issue of shares or debentures. This imposes a constant burden on earning of a company and earning becomes low.

(b) Acquiring asset at inflatted price: Asset may be acquired at inflatted price or at a prices were at their peak. In this case, the real value becomes lower than the book value and the earning also becomes low.

(c) Formation during boom period: If the establishment of new copr expansion of an existing concern takes place during the book period, it may be a victim of over capitalisation. This is because of all assets are acquired at fabulous prices.

(d) Over estimation of earnings:  The promoters or directors of a company may over estimate the earning of the company and raise capital accordingly. If a company is not in a position to invest this fund profitably, the rate of earning per share will be loss.

(e) Inadequate depreciation:  Absence of suitable depreciation policy would meet the value of assets superflows. The productive capacity of the assets is diminished which depress the earnings.

(f) Liberal dividend policy:  The company may follow a liberal dividend policy and may not retain sufficient funds for self financing. It leads to over capitalisation in the long run.

(g) Heavy promotional expenses:  It expenses incurred for promotion, issue and underwriting of shares, promoters remuneration etc proved to be higher as compared to the benefits the enterprise will find itself over capitalised.

(h) Taxation policy: The high rate of taxation learn tittle sum of money in the heads of the management to provide for depreciation, replacements and dividends. This will adversely affect earning capacity and thus leads to over capitalisation.

(i) Inadequate demand for products :  If a company's product does not find a satisfactory market, the profitability of the concern will come down and as a result the rate of return and capital invested will decline leading to over capitalisation.

(j) Payment of high rate of interest: Borrowing of funds from financial institutions or debentures holders had high rate of interest will adversely affect the company resulting in over capitalisation.