I had invested in 250 shares of L& T of Rs. 10 each. Due to recent decision of de-merger they have sent me in replacement 100 shares of UltraTech CemCo Limited of Rs. 10 each and 125 shares of Larsen & Toubro Limited of Rs. 2 each.
Before de-merger face value of my investment was Rs. 2500 (250*10) now the face value has reduced to Rs. 1250 (100*10 + 125*2). As far as I know, a company cannot reduce its paid up capital until unless it need to write off its losses. And L & T is a very profitable company that does not have any loss on its balance sheet to write off.
What accounting entry they are making for the above. Are they converting paid up capital into capital reserve? Can anybody tell me whether it’s legally correct?
Even if its legally correct does it make sense to de-merge the company when it leads to 50% reduction in capital? What assets they are writing off that has lead to 50% erosion of capital. Is it in the interest of the shareholders or is it something to do with professional management trying to retain control? 20% shares are being transferred to employees fund...at whose cost??
Wednesday, June 16, 2004
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