Translation: Capital Reduction (to extinguish accumulated losses) - تخفيض رأس المال

Simplified Definition: It is a regulatory accounting procedure, a "bookkeeping beautification" that distressed companies resort to in order to wipe out or reduce their accumulated losses that have consumed a large part of their funds. This is done by writing off part of the company's capital and using it to reset the loss counter. In other words, it is merely a transfer of numbers from one column (capital) to patch a hole in another column (accumulated losses) within the company's balance sheet; without any new liquidity entering the company, and without changing the total owned by the shareholders.

How is it recorded in the statements? Within the "Equity" section: (Old Capital) - (Reduction Value) = New Capital. (Accumulated Losses) + (Reduction Value) = Zero (or significantly reduced). Result: Total equity before reduction = Total equity after reduction.

Note (Implementation Mechanism and System):

  • Write-off Method: The reduction is usually done by "cancelling shares". For example, the company cancels one share for every two shares owned by the shareholder.
  • Price Adjustment: To maintain the market value of the company and shareholders' rights, the financial market (Tadawul) automatically raises the price of the remaining share on the screen the day after the reduction; to compensate for the decrease in the number of shares.
  • Systemic Motivation: According to the Companies Law, if a company's accumulated losses reach half of its capital (50%) or more, it falls within the scope of "warning flags" (yellow and red signs) and becomes threatened with suspension or delisting from the market if it does not address its situation, making the reduction a regulatory lifeline to remain in the market.

Example: Suppose a company has a capital of 100 million riyals (divided into 10 million shares). Over the years, the company has accumulated losses of 40 million riyals. The total equity here = 60 million riyals (100 - 40). The company decided to reduce its capital by 40% to extinguish these losses. What will happen: 40 million will be withdrawn from the capital to wipe out the losses. The new capital will be: 60 million riyals. The accumulated losses will be: zero. Total equity = 60 million riyals. (Nothing has changed economically; the procedure is merely a rearrangement of the books).

What does it mean for you?

  • Positive Point (Regulatory): The company exits the circle of systemic danger and the threat of suspension of trading of the share, and "zeroing" the losses paves the way for the company in the future to distribute cash dividends if its business improves (because the system prevents dividend distribution when there are accumulated losses).
  • Negative Point (Economic): The reduction does not address the root cause (weak revenues or high costs). If the company continues to record losses after the reduction, its new (smaller) capital will erode much faster, and it will soon need to seek new funds from shareholders through what is called "capital increase with preemptive rights".

Common Question: When the company implements the capital reduction decision, I find that the number of shares in my portfolio has decreased (for example, from 1000 shares to 200 shares), does that mean I lost my money and it was stolen?

Answer: Yes, your number of shares decreases, but you did not lose any additional money at the moment of the reduction. The total value of your portfolio on the day of the reduction remains exactly the same.

How? Because reducing the number of shares is matched by an increase in the price of the remaining share on the screen by the same percentage. (For example: 1000 shares at 10 riyals = 10,000 riyals, will become after the reduction 200 shares at 50 riyals = 10,000 riyals). The real loss of your money did not occur on the day of the reduction, but gradually occurred in the past over the months and years that the company was recording operational losses, which caused its share price to drop in the market in the first place. The reduction is merely an "official announcement" and a paper correction of those previous losses.