The process of decreasing the amount of a company’s shareholder equity is called share capital reduction. There are many ways that this can be executed such as share cancellations and share repurchases, which is also known as share buybacks.
To create a more efficient capital structure and increasing the shareholder value, companies will look to reduce its share capital. It is important to note that while the company’s market capitalisation will not change because of the share capital reduction, the number of outstanding shares and traded shares will decrease.
Another scenario where capital reduction may be executed is to respond to a decline in operating profits or loss of revenue that cannot be recovered from a company’s expected future earnings. In some capital reductions, shareholders will receive a cash payment for shares which have been canceled, but in most other situations, the impact on shareholders is minimal.