What is Capital Increase?

What is Capital Increase
Companies; It can raise funds for various purposes by borrowing, going public and increasing capital. Capital increase means that a company sells its new shares at their nominal value or at a higher price in order to increase its existing capital (paid capital increase) or gives it to its shareholders at a certain rate in return for its internal resources (free capital increase). In this article, you can find answers to the questions what is capital increase, why is it done, what does paid and unpaid capital increase mean.

Capital increase, which is a cheap financing method, can simply be defined as a company increasing its existing capital. In other words, capital increase; It is the inclusion of external or internal resources into the company capital. A company can increase its capital in exchange for new shares after paying the price of the shares corresponding to its basic capital.

There are two types of capital increases: paid and free of charge. Paid capital increase means that companies sell their paid shares (shares) at their nominal value or at a higher price in order to obtain a new fund source. Paid shares can be sold to existing partners (right of first refusal) or other investors.

Bonus free capital increase is the distribution of shares issued by companies in return for the amount they transferred from their internal resources to the capital, to the partners without receiving a fee. At this point, the equity composition is changing and there is no external fund inflow. The shares issued as a result of this transaction are defined as bonus shares.

Why is capital increase carried out?

Companies; With the aim of providing cheap financing to increase activities, they may increase capital in mandatory situations such as efficient use of equity composition, that is, transfer of sub-items in equity capital to paid-in capital, or in cases where the company's capital falls below the lower limit specified by law.

The main purpose of capital increase is to meet the cash need to increase the company's activities without borrowing, that is, with cheap resources. Companies; They may increase capital in order to increase capacity, enter new markets, offer new products or services, build factories for the production of the products and services in question, update their technology infrastructure or finance large-scale R&D projects, gain a competitive advantage and expand their assets. Since capital increases can provide cheap financing and therefore lower borrowing needs, it also means a practice that strengthens the financial structure of companies and makes risks more manageable. Companies can also increase their capital in order to reduce their debts or pay their debts under more favorable conditions.

Capital increase free of charge; It aims to create resources in order to use the equity composition efficiently, that is, by transferring the unusable parts of the capital such as revaluation increase, reserves, profits from sales of affiliates and fixed assets and emission premiums, as well as company profits (dividends, dividends) to the paid capital without distributing them to the partners. In addition, converting equity items into paid-in capital items also provides tax advantages to companies. Another advantage of free capital increase is that it provides the opportunity to strengthen the capital of companies whose capital is eroded in inflationary environments. However, as a result of the share split realized through bonus capital increase, the liquidity of the relevant share may be positively affected. In other words, the liquidity of a share whose price increases before the capital increase may be low due to buying and selling transactions.
What is Paid Capital Increase?

Paid capital increase means that companies increase their capital by selling their paid shares (shares) at a price at or above their nominal value in order to obtain a new fund source. Paid shares can be sold to existing partners (right of first refusal) or other investors (restriction of right of first refusal). In other words, unlike a free capital increase, capital is increased through external sources.

In case of paid-in capital increase, the priority right to purchase new shares belongs to the existing shareholders. This right is defined as the right of first refusal or the right to acquire new shares. In order for shareholders or partners to have priority rights, they must own shares of the relevant company before the paid capital decision. The priority right must be used within the dates determined by the company. Accordingly, the priority right usage period is at least 15 and at most 60 days. Shareholders who wish to exercise their preemptive right must keep the capital increase fee in their investment accounts within the announced periods and convey their desire to participate in the paid capital increase to their intermediary institutions.

However, it is not mandatory to use the priority right. Investors who do not prefer to exercise their right to purchase new shares can sell their preemptive right coupons at the Borsa Istanbul Preemptive Right Coupon Market. If the pre-emptive right is not used or sold, shareholders may suffer losses because the price of the share will decline (dilution effect), even if the number of shares on hand remains the same after the paid-in capital increase.

Number of Paid Shares: Current Lot x (Paid Rate / 100)
Total Lot After Capital Increase: Current Lot + Lot to Be Earned
Capital Increase Fee: Preemption Right x Preemption Right Exercise Price
New Price: Old Price / (1+(Split Rate / 100))
Market Value After Capital Increase: New Price x Capital

After the paid-in capital increase, the paid-in capital of the company increases by the rate of the paid-in increase. However, although the value of the shares will decrease compared to before the paid-in capital increase, the market value of the company will also increase as the number of lots will increase. On the other hand, the purposes for which the resources provided by the paid-in capital increase will be used are also one of the important factors affecting the price of the stock.
What is Free Capital Increase?

Bonus-free capital increase is the distribution of shares issued by companies in return for the amount they transferred from their internal resources to the capital, to the partners without receiving a fee. Unlike the paid-in capital increase, there is no external fund inflow, only the equity composition changes. The new shares issued as a result of this transaction are distributed to the partners without any fee. For this reason, the relevant shares are called bonus shares.

In-house resources are used in the free capital increase. In the paid-up capital increase, which is generally made by adding undistributed retained earnings to the paid capital; In addition, equity items such as emission premium, revaluation value increase, reserves, profit from sales of participation and fixed assets can also be used. In other words, the total equity in the balance sheet remains constant. Sub-items of equity capital are used as paid-in capital.

In bonus-free capital increases, there is no period for the right to receive bonus shares. The new shares to be earned as a result of the free capital increase are automatically reflected in the investment accounts of the shareholders.

New Price: Old Price / (1 + (Free Rate / 100))
Capital Art. Lot to Obtain After: Current Lot x (Split Amount / 100)
Total Lot After Capital Increase: Current Lot + Lot to Be Obtained
Market Value After Capital Increase: New Price x Capital

As a result of the bonus capital increase, the number of shares in circulation increases by the division ratio. Therefore, the number of shares held by shareholders will increase accordingly. However, since there is no additional resource inflow to the company, the market value of the partnership should not change. Therefore, after the free capital increase, the share price will decrease in parallel with the division rate. In other words, although the number of shares held by the investor increases, the total value of his assets remains constant. A decrease in the share price may positively affect the liquidity of the relevant share. In other words, a share whose price increased before the capital increase may have low liquidity due to trading transactions. As a result of the free capital increase and the increase in the number of lots, the share price may decline and thus more investors may turn to the relevant stock.