What is Permissible Capital Payment (PCP)?
A Permissible Capital Payment, or PCP, is a financial mechanism employed by companies when redeeming or purchasing their own shares. This payment is made out of the company’s capital funds, but only after exhausting all available distributable profits and the proceeds from any new issue of shares. The PCP serves as an essential vehicle for companies aiming to reduce their share capital while ensuring compliance with statutory requirements.
Key Considerations:
- Legal Compliance: Companies must comply with statutory regulations governing the redemption or repurchase of shares using capital payments.
- Shareholder Approval: Typically, a special resolution from the shareholders is required to authorize the use of capital for share purchases.
- Capital Reduction: The process often results in a reduction of the company’s share capital, affecting the balance sheet and equity structure.
Examples of Permissible Capital Payment (PCP)
Example 1: A company, ABC Ltd, has distributable profits of $500,000 and intends to buy back shares worth $1,000,000. After utilizing the distributable profits, it needs an additional $500,000. It raises $300,000 through a new issue of shares but still requires another $200,000. To cover this, ABC Ltd makes a PCP of $200,000 from its capital reserves.
Example 2: XYZ Corporation decides to redeem a portion of its outstanding shares. The total cost for redemption amounts to $2,000,000. After utilizing its entire distributable profits of $1,200,000 and the proceeds from a recent share issue of $500,000, it faces a shortfall of $300,000. The company then conducts a PCP out of its capital to cover the remaining amount.
Frequently Asked Questions (FAQs)
1. What are the legal requirements for a PCP?
- A: Generally, a company needs to pass a special resolution of its shareholders and adhere to statutory regulations, ensuring all available distributable profits and share issue proceeds are used first.
2. Can a company make a PCP at any time?
- A: No, a company can only make a PCP after it has exhausted all distributable profits and the proceeds from any new issue of shares.
3. How does a PCP affect a company’s financial statements?
- A: A PCP results in a reduction of the share capital and may impact the company’s equity structure, affecting the balance sheet presentation.
4. What is the difference between a PCP and a normal share redemption?
- A: A normal share redemption uses distributable profits and share issue proceeds, whereas a PCP involves using capital funds once these other sources are depleted.
5. Is shareholder approval mandatory for a PCP?
- A: Yes, typically, a special resolution from shareholders is required to authorize a PCP.
Related Terms
Distributable Profits:
- These are profits available for distribution to shareholders as dividends. They must be utilized before a PCP.
Share Redemption:
- The process by which a company buys back its own shares from shareholders, usually from distributable profits.
Capital Reduction:
- An action taken to decrease a company’s share capital, often associated with share buybacks and PCPs.
Own Shares Purchase:
- Refers to a company buying its own shares from the market or shareholders, which can be financed through distributable profits, new issues, or PCP.
Treasury Shares:
- Shares that have been bought back by the company and held in the company’s treasury, not to be reissued or canceled immediately.
Online References
- Investopedia - Share Redemption
- Corporate Finance Institute - Capital Payment
- AccountingTools - Own Shares Purchase
Suggested Books for Further Studies
- “Advanced Accounting” by Floyd Beams, Joseph Anthony Hrazdil, and Suzanne Ward
- “Corporate Finance: Theory and Practice” by Aswath Damodaran
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Accounting Basics: “Permissible Capital Payment (PCP)” Fundamentals Quiz
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