Jun 25, 2019

Capital increase

Financing via Capital Increase

Capital increase is in fact a method of financing for companies, and it is used when cash funds and financial resources are needed for new activities and /or development of existing activities. Another occasion when companies proceed with capital increase is existence of legal requirements and/or receiving authorization from competent authorities by which the ceiling of a specified capital has been determined.

Types of Capital Increase Methods

According to the Iranian Commercial Code, the process of capital increase by a stock company entails receiving authorization from the company’s extraordinary general meeting, and the conditions relating to the sales of new shares and settlement of its amount are determined by such meeting or its authority is delegated to the company’s board of directors. Also, feasibility plan in respect of capital increase has to be prepared for carrying out any capital increase.

1) Capital Increase through Contribution in Cash

In this method, commonly, no profit due from previous activities is saved in the company’s reserve accounts and/or the company’s owners and managers prefer to make use of new out-of-company resources. In this method, in order to keep constant the ownership percentage of previous shareholder in the company’s shares, the company’s shareholders enjoy preemptive right concerning purchase of new shares pro rata the shares they own, and they are entitled to transfer such a right.

2) Capital Increase via Shareholders’ Receivables

Companies may offer new shares to the shareholders in return for their receivables. In other words, companies may increase their capital by transferring their current shareholders’ receivables (profit accrued to them in consideration of the company’s operation in the past) from the entry of liability account to the capital account. In such a transference which is carried out on the basis of nominal value of shares, the company’s liability is converted into capital, i.e., the shareholder’s claims from the company are turned into shares for them. In such a capital increase, new money does not enter the company and an account of the company is converted into another account. 

3) Capital Increase via Reserve and Retained Profit

Commonly, companies do not distribute entire profit earned in a financial year among the shareholders, and they maintain a part of earned profit as retained profit or reserve in equity so it may relieve them of some burden in special occasions. Such an occasion is when a company is in need of new resources for making capital expenditures (e.g., purchase of equipment and long-term assets). In such cases, a company makes use of such reserve and proceeds with payment of investment costs, and in return, it issues bonus shares via capital increase through retained profit and reserve and gives them to the shareholder. In this method too, no new cash fund enters the company; only the shares owned by the shareholder are numerically increased. Such a share which accrues to the shareholder is called stock dividend or bonus share.

4) Capital Increase via Reassessment of Assets

Reduction in the value of currency during a period, or in other words, existence of inflation brings about major changes in the purchase prices (cost price) of long-term assets and equipment of companies at their market price (fair value) over time. On one hand, regarding that the assets reflected in the balance sheets of companies at historical costs (cost price), over time, a wide gap grows between them and the current values which indicate economic realities, and on the other hand, it causes irrelevancy of companies’ accounting information and also by failing in reflection of real amount of the companies’ assets, the market (fair) value of shares of such companies gets different with their intrinsic and real price. Nevertheless, in order to fix these two flows, companies are allowed to reassess their assets and utilize this appreciation in value called valuation surplus, for capital increase. Such valuation surplus has been, in fact, a reserve for the company. Capital increase from reassessment of assets enters no new resources, hence it cannot be regarded as a profit-bearing option; but, anyway, it may be used as a tool for providing the growth conditions of companies, updating and transparency of financial statements and eliminating accumulated losses.

 

Services of Amin Nikan Afagh Investment Advisory:

Relying on scientific and operational capabilities of our experienced specialists and in consideration of fair and unbiased conditions, we provide an aggregate of services concerning capital increase. Some of our services are listed below:

1)     Make use of the advisor’s experiences concerning the quality and source of capital increase, prepare feasibility report on capital increase, and seek the opinion of the company’s auditor and good understanding between the advisor and Securities and Exchange Org.

2)     Represent the issuer of securities at the Securities and Exchange Org. until offering such securities

3)     Make certain of authenticity of information provided to the Securities and Exchange Org.