It is the complete overhaul of the capital of a distressed company to save it from liquidation. The object of it is to enable the company to continue as a going concern by the removal of the burden of immediate debt, the attraction of additional capital and the creation of a viable financial structure.
The reconstruction of capital, which is also known as capital reconstruction, is defined as the plans made by a company for the restructuring of its capital base. Capital reconstruction involves major alterations in the capital base of a company. It is related to the term capital restructuring.
There are two types of capital reconstruction. These are splits and consolidations. Split is an easy principle to understand. Under the principle of splits, a company basically splits its capital base. For instance, a company may split its base of capital by issuing two new shares for every one share held by the shareholder. For example, if the company has 50, 000, 000 shares at its disposal, it can split its base of capital to 100, 000, 000 shares. Capital reconstruction may or may not include a return on capital.
On the other hand, consolidations are the opposite of splits. In the above example, the company split its 50, 000, 000 shares into 100, 000, 000 shares. In the case of consolidations, however, the company may consolidate the 100, 000, 000 ordinary shares at its disposal into 50, 000, 000 ordinary shares by giving shareholders only one new shares for every two shares they hold.
The process of re-engineering the capital base of a company. This could be done internally or externally. Internal construction is a process where capital is reconstructed within the existing shareholder, while external is where capital is reconstructed among the existing and prospective shareholders.
