Which is a better option; an over-capitalized company or an under-capitalized company? Support your answer with reasons. Also suggest some remedies to rectify both in a company.

A company is required to balance between its debt and equity in its capital structure and the funding of the resulting deficit. Neither of the two is a good option. A company is said to be over-capitalized, if its earnings are not sufficient to justify a fair return on the amount of share capital and debentures that have been issued. A company is said to be under-capitalized if the owned capital of the business is much less than the total borrowed capital. In this case the business is dependent more upon borrowed capital. Hence we can see that both these options are not good. An ideal situation would be fair capitalization or optimum capitalization. An over-capitalized company can restructure by taking following steps: (i) Buy-back of own shares. (ii) Paying back surplus share capital to shareholders. (iii) Repaying loans to financial institutions, banks, etc. (iv) Repaying fixed deposits to public, etc. (v) Redeeming its debentures, bonds, preference shares etc. An under-capitalized company may restructure its capital by taking one or more of the following corrective steps: (i) Injecting more capital through public issue, rights issue. (ii) Resorting to additional borrowings. (iii) Issuing debentures, bonds, preference shares etc. (iv) Inviting and accepting fixed deposits from directors, their relatives etc.