What is a Company Capital Increase and How is it Done?

When joint-stock companies and limited liability companies are established, capital is contributed to create the company's financial assets. Company partners are required to contribute capital for the company's expenses, regardless of the purpose or reason for the expenditure. Capital can be contributed in the form of cash or assets that can be converted into cash. If a specific amount is stipulated for a capital increase in the company's general assembly or articles of association, a partner who cannot contribute cash may contribute assets that can be converted into cash in equivalent value.

Companies increase their capital to secure resources for the company. Companies are constantly evolving and vital institutions. Whether in the service or manufacturing sector, they continuously need resources to operate. The resources needed for a company to survive and continue operating can be met through a capital increase. The most important reasons for companies to increase their capital are the need to find resources, tax advantages, or the desire to increase the value of their shares. Company shareholders can proceed with a capital increase based on their decision.

Capital increases can be carried out through paid-in capital increases and bonus share issues. Capital increases offer numerous benefits to companies, both in practice and in theory.

Capital increases can be carried out in various ways. Capital increases made using external resources are called paid-in capital increases, while capital increases made using company resources are called bonus share increases. Companies can increase their capital in the following ways:

• Partners contributing to the company's capital
• Adding company profits to capital instead of distributing them to shareholders
• Taking on a new partner or partners in the company
• Merger of the company with another company
• Addition of revaluation funds to capital
• Converting company debts into equity

Depending on the company's situation or the decision made by the partners, one of these methods may be used.

What is a Paid-in Capital Increase?

In a rights issue, companies issue new shares and sell them for a specific price. The capital increase is carried out using external resources rather than internal funds. The newly issued shares are sold, providing the company with resources. Shareholders can purchase the shares issued for the rights issue if they wish. Shareholders have a pre-emptive right, meaning they have priority in acquiring the issued shares. This pre-emptive right, also known as priority right, grants priority to shareholders. Shareholders can purchase the issued shares in proportion to their shareholding in the company, provided they pay the price in cash. This completes the rights issue.

If shareholders do not wish to purchase the newly issued shares, they can sell their pre-emptive rights through the coupon market. A capital increase through a rights issue offers several advantages to both the company and its shareholders. After a rights issue, both the company's value and the value of its shares change, which is beneficial for both. Another advantage is for the shareholders themselves, as new shares can be issued, allowing them to acquire new shares in proportion to their existing holdings.

What is a Bonus Share Issue?

A bonus share issue is slightly different. It's a capital increase made to companies without any contribution from shareholders or other individuals. A bonus share issue is when a company uses its own internal resources, such as revaluation increases, reserves, gains from the sale of affiliates and fixed assets, and share premiums. In this case, shareholders don't have to spend any money. In addition to using company resources to increase capital, the company distributes bonus shares to its shareholders without requiring any additional funding.

Bonus share issues are one of the important weapons companies use to combat inflation. This method is employed to prevent the erosion of company capital due to inflation. In a bonus share issue, the company doesn't have to worry about finding resources; on the contrary, the increase is achieved using the company's own resources.

So, what are the advantages of a bonus share issue? One of the biggest advantages of a bonus share issue is related to taxation. In particular, bonus share issues made through gains from the sale of subsidiaries and fixed assets, and through share premiums, provide a tax advantage.