The effect of over capitalisation? The remedies to over capitalisation
The effect of over capitalisation on different selections of the society can be discussed under the following heads. A. Effect on the corporation (i) Destroys the goodwill: over capitalisation market by low earning capacity destroys the reputation of the company which ultimately effects the prospects of the business. (ii) Difficulties in raising additional funds: Over capitalisation brings down the credit standing and the financial reputation of the company. Thus it funds difficulty in mobilising additional funds. (iii) Borrowings at higher rate of interest: An over capitalised company which is not able to raise capital from the shareholders may get loans at higher rate of interest. It will further deteriorate the position of the company. (iv) Resort to unfair practice: It may force the management unhealthy practices of window dressing (fake report) of earnings that is may not provide sufficient depreciation and also neglect the maintenance and replacement of assets. B. Effects on sh