The proposal, made under the Sri Lanka's new company law, is to be approved by shareholders at an Extraordinary General Meeting on August 15.
The reduction will be effected by setting off the brought forward losses of the company against its stated capital to the extent of 244.5 million rupees and by cancelling 22.6 million shares where 50 percent of the issued and paid up shares held by each shareholder will be cancelled.
Dankotuwa will write off a similar amount of 244.5 million rupees from the company's carried forward losses as at the end of the financial quarter March 31, 2007.
The company made a 400 million-rupee loss in the year ended December 2006 and has announced plans to raise funds through a rights or debenture issue.
The firm reported a sharply lower loss for the first two months of the current financial year in what appeared to be the beginnings of a turnaround.
Dankotuwa has said problems with its kiln and high energy and wage costs drove it into the red last year.Sky-high domestic inflation rates and an over-valued rupee were also making it difficult to compete in international tableware export markets.