What is Capital Injection
Capital injection is an investment of capital into a company or institution, generally in the form of cash, equity, and debt. The word "injection" connotes that the company or organization getting capital may be in financial distress, although it is not uncommon for the term to also refer to investments made in a startup or a new company.
BREAKING DOWN Capital Injection
Capital injections in the private sector are usually in exchange for an equity stake in the company that is receiving the funds. Capital injections can occur throughout the life cycle of a business. For example, at the establishment of a firm, it may open a seed round of cash investments from friends, family, and hand-selected angel investors. In return, the investors receive a portion of the company's ownership. If a private company in a growth phase wants to fund its momentum further, it can open a series-A investment round, or it can take out debt, both of which are capital injections. If a mature company decides to go public, the money it earns through the issuance of shares is also a capital injection.
Examples of Capital Injections
There are other ways that a company or organization can receive a capital injection. Sometimes, governments make capital injections into struggling sectors to assist in their stabilization for the public good. In a case like this, a government may negotiate an equity stake in recipient companies or institutions. It may also treat the capital injection as a debt. For example, following the unprecedented financial crisis of 2008, the U.S. government, as well as other governments around the world, injected hundreds of billions of dollars into their financial sectors. These capital injections were an attempt to halt the conflagration that was threatening to engulf the global economy.
Some international financial institutions have never recovered from the 2008 crisis and require consistent capital injections to remain afloat. For example, Banca Monte dei Paschi di Siena S.p.A., Italy's oldest commercial bank, has faced multiple instances of financial distress. In fact, the bank received two capital injections by the Italian government as of July 19, 2016.
The floundering bank was stricken after the United Kingdom voted to leave the European Union in June 2016, and the European Commission responded by authorizing the Italian government to give Monte Paschi a $167 billion capital injection. The potential infusion would come in the form of convertible bonds purchased by the government.