What Are Capital Reductions in Business

Google+ Pinterest LinkedIn Tumblr +

Capital reduction is a decrease in equity of a company, and is therefore the opposite of capital increase. With capital reduction, it is practical to remove a current balance sheet and hand out excess capital to shareholders.

In the case of capital reduction, there are specific rules that apply aimed at protecting creditors. On the other hand, the ordinary share capital reduction and capital reduction via cancellation require satisfaction of applicable claims, and can also provide security. Additionally, they may be paid to shareholders within six months after publication.

The simplified capital reduction of creditor protection is less solid, since there is no repayment to shareholders which means nothing is lost from the debt coverage potential. Instead, there are restrictions on the distribution of future profits, and a dividend ban as long as the legal reserve amounts to less than 10% of the share capital.

The pressured feeding of shares in relation to capital reduction in stock companies is done through the repurchase of shares identified as a stock buyback.

Specifically, the share buy-back of listed companies is achieved through setting up a so-called second line company in the stock market, where shareholders can tender their securities, rather than act on the normal stock market.

The company is not obligated to actually effect a purchase, and exercising the option depends on whether enough shares are tendered. This share buy-back is not  to be confused with the purchase of own shares, which causes no change in the share capital, as opposed to the share repurchase.

By reducing the number of shares in free circulation, it translates to the reduced liquidity in the trading. The effect on the value of individual stocks is not clear, although the percentage increases in the company, and on the other hand, the equity is reduced and thus the capital structure is projected in a risky manner.

Ultimately it comes down to how profitable the business is operating, and a lot depends on economic factors, if they are favorable it means the more positive the impact of the repurchase program.

For the implementation of an ordinary capital decrease, it is necessary that the annual general meeting decides on the capital reduction. The purpose of capital reduction should considered in the decision, and the decision of the capital reduction entered in the commercial register.

A simplified capital reduction is earmarked for various purposes and these include compensation for impairment, covering losses and the transfer of amounts in the capital reserve.



About Author

Leave A Reply