A reduction of share capital is an event where the share capital is decreased by transferring an amount from restricted share capital to unrestricted equity or by distributing it to one or more shareholders. A reduction of share capital can occur with or without a cancellation of shares.
Without Cancellation of Shares: If no shares are cancelled, the quota value of all shares will decrease because the numerator in the formula (quota value = share capital / total number of shares issued) is reduced. Shareholders retain the same number of shares, each with a lower quota value, but the total value remains unchanged.
With Cancellation of Shares: If shares are cancelled, the quota value remains unchanged. In this case, shareholders end up with fewer shares but each share retains its previous quota value, resulting in a lower total value.
Purposes of a Capital Reduction:
To cover a loss when the company has no unrestricted equity available.
To return capital to shareholders.
To buy out a particular shareholder.
As an alternative to paying dividends, for liquidity or tax reasons, by cancelling shares rather than distributing cash.