Capital Reduction

What Is Capital Reduction?

Capital reduction is the method involved with decreasing a company's shareholder equity through share scratch-offs and share repurchases, otherwise called share buybacks. The reduction of capital is finished by companies for various reasons, including expanding shareholder value and creating a more efficient capital structure.

Figuring out Capital Reduction

After a capital reduction, the number of shares in the company will diminish by the reduction amount. While the company's market capitalization won't change because of such a move, the float, or number of shares outstanding and [available to trade](/held-for-exchanging security), will be reduced.

The act of capital reduction may likewise be enacted in response to a decline in a company's operating profits or a revenue loss that can't be recuperated from a company's expected future earnings. In a few capital reductions, shareholders will receive a cash payment for shares canceled, yet in most different circumstances, there is negligible impact on shareholders.

A company is required to reduce its share capital utilizing a set of specific advances. Initial, a notice must be conveyed to creditors of the resolution of the capital reduction. Second, the company needs to then present an application for entry of the reduction of share capital no sooner than 90 days after publication of the initial notice. Share capital reduction is then expected to be paid to shareholders no sooner than 90 days after the entry of reduction in the commercial register.

Illustration of Capital Reduction

Many companies choose to reduce capital through repurchase agreements (buybacks). For instance, Sirius XM Radio, an American telecom company that gives promotion free satellite radio services, announced on January 29, 2019 that its Board of Directors had approved an extra $2 billion common stock repurchase. The extra $2 billion repurchase in 2019 will carry the company's buyback approvals to $14 billion altogether beginning around 2013. Sirius XM will fund the repurchase through cash available, future cash flow from operations, and future borrowings.