Capital Reduction with Refund

1. Definition

Capital Reduction with Refund (often referred to as Real Capital Reduction) is a corporate action where a company reduces its capital stock by repurchasing shares from shareholders and canceling them, providing cash compensation in return. Unlike nominal reduction, this involves an actual outflow of corporate assets (cash).

2. Purpose

2.1. Optimization of Capital Structure

When a company has excess capital relative to its business needs, it may reduce capital to improve financial efficiency ratios, such as Return on Equity (ROE).

2.2. Return of Investment

It is used as a method for shareholders (often major ones) to retrieve their initial investment or during corporate restructuring processes like mergers and demergers.

3. Methods

The company repurchases shares from shareholders and subsequently retires (cancels) them. * If the repurchase price > Par Value: Capital Adjustment (Loss on Capital Reduction) occurs. * If the repurchase price < Par Value: Capital Surplus (Gain on Capital Reduction) occurs.

4. Impact on Shareholders

Shareholders receive cash in exchange for their surrendered shares, effectively acting as a return of capital. If the repurchase price is set higher than the current market price, it can be beneficial for shareholders.