Capital Reduction without Refund

1. Definition

Capital Reduction without Refund (often referred to as Nominal Capital Reduction) is a process where a company reduces its shareholder equity (capital stock) without returning any money to shareholders. This is typically undertaken by companies in financial distress to wipe out accumulated losses (deficits) and restructure their balance sheet. It is generally viewed as a major negative event for shareholders.

2. Methods

2.1. Share Consolidation (Reverse Split)

Combining multiple shares into a single share. * Example: A 10-to-1 reduction means a shareholder with 1,000 shares will hold only 100 shares after the process.

2.2. Par Value Reduction

Lowering the par value of shares while keeping the number of shares constant.

3. Accounting Effect

• Debit: Capital Stock (Decrease)
• Credit: Gain on Capital Reduction (This surplus is immediately used to offset accumulated deficits.)

4. Characteristics

Since no assets leave the company, it is considered a "nominal" change. The primary goal is to remove the impairment of capital and prepare the company for potential future fundraising or normalization.