What Is a Capital Reduction?

Capital reduction is an act of reducing the registered capital of a joint stock company. Its main purposes are: to pay debts in one lump; adjust excessive capital; to distribute dividends; to merge companies; to separate departments. Divided into two types of substantial capital reduction and nominal capital reduction. Substantial capital reduction is to reduce the company's book capital while reducing the company's assets by the same amount, and return these assets to shareholders or transfer to others. Nominal capital reduction only reduces the amount of book capital, and the company's property does not decrease accordingly. Therefore, it cannot return anything to shareholders and transfer assets to others. There are two methods of reducing capital: reducing the number of shares and reducing the face value of shares. ^[1]

Capital reduction

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There are several reasons for reducing the capital of enterprises:

(1) One-time payment of accumulated debts. Due to the accumulation of operating losses for many years, even in the next few years, the profits of the enterprise cannot be made up. In this case, it is necessary to reduce capital to make up for the accumulated losses.

(2) Adjust excessive capital. In the early stage of the company's establishment, a huge amount of capital is needed. After entering the right track, there may be excess funds, so it is also necessary to reduce capital.

(3) Increase dividends. Since dividends are distributed based on the amount of capital profit, reducing capital can increase dividends. At the same time, it can also be combined with "one-time payment of accumulated debts" to sweep away losses and restore dividends as soon as possible.

(4) Company merger. This is usually done when the company's assets are balanced.

(5) The separation part. When some departments of the company are separated and separated, the assets are also separated, which is also a capital reduction for the enterprise. There are two types of reductions: formal and substantial. Formal capital reduction refers to the reduction of capital only on the ledger, but the company's property does not decrease, such as a company buying back a certain percentage of

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There are two ways to reduce capital:

1. Reduce the total capital contribution and change the original capital contribution ratio.

Companies usually use buybacks to reduce capital or shares. However, it should be noted that, in accordance with Article 142 of the Company Law, to reduce capital through repurchase, the repurchased shares shall be cancelled within 10 days after the repurchase. ^[2]

List of information required by the company for capital reduction ^[2] :

1.Announcement of financial statements after 45 days (balance sheet, profit statement)

2. Preliminary capital verification report

3. Copy of business license

4. New articles of association, resolutions of the new shareholders' meeting, old articles of association

5. A copy of the shareholder's ID card. If there is a legal person share, a copy of the business license of the legal person share is required

6.Original and photocopy of newspaper

7. Bank statement before capital reduction

8. The latest capital verification report

Note: The duplicate materials must be stamped with the company seal