| Forte Oil | ||
| Currently | Post Set Off | |
| N’m | N’m | |
| Share Capital | 539 | 539 |
| Share Premium | 62,292 | 7,105 |
| Forex Reserve | -62 | -62 |
| Retained Earnings | -55,187 | – |
| Shareholders Funds | 7,582 | 7,582 |
Reports indicate Forte Oil Plc is planning to set off its negative reserves against its share premium to enable the company pay dividends as quickly as they want. It is obviously a clear move to appease shareholders and investors alike. However, it does come with some disadvantages which I will like to enumerate below;
De Merits
1 Their ability to declare bonus issues is depleted – Bonus shares are usually paid from share premium accounts as such when it is depleted as the company will be reluctant to issue bonus shares
2 Net Assets remain very thin with little retained earnings that can be used to fund new business – Retained earnings are the financial arsenal of any company. It has been negative for years now. Whilst going from negative reserves to zero is good, it still doesn’t mean the company has adequate financial arsenal
3 New Capital May be raised – Likelihood that new capital will be raised to ensure there is adequate working capital to fund new operations and new investment
4 Debt to equity – The company’s debt to equity is still high at 1:1
5 Not advisable to pay dividends – Dividends payment is not advisable as there will be need to biuld adequate retained earnings. However, even if dividend is paid it wil be small relative to profitability. In reality thought, their share price may plummet if dividends is not paid. The market hates to compromise dividends.
6 It will take time for the company to build its reserves – Builiding reserves does take time not especially in this very competitive market. They will need to make profits of like N5billion annually to get to N50billion in revenue reserves
7 Corporate Mirage – Setting off premium against reserve gives a false impression that the company’s finances are in order
8 Pressure on share price – Share price will be under pressure to justify its valuation in view of the very light reserves
9 It may need to be approved by lenders to the company who may have held the shares in lien – The Company and Allied Matters Act require the company to get approval of lenders before share premium account can be used to set off reserves
10 More Taxes – A tax liability may arise if it decides to improve its shareholders funds by revaluing its assets
Remedies
1 Revaluation reserve might be created tapping into the market value of assets to shore up capital
2 The company can increase its capital through acquisitions
3 Share capital can also be increased through value appreciation from assets acquired or via debt
