What Is a Capital Increase? Types of Capital Increase and the Process
What Is a Capital Increase?
A capital increase is the process by which a company strengthens its capital structure by increasing its share capital above its existing amount. This process can be carried out either by the company’s shareholders contributing additional capital or by transferring eligible internal resources held within the company to share capital, as permitted by applicable legislation. As a result of a capital increase, the company’s registered share capital increases, subject to the relevant resolutions and registration procedures. Depending on the nature of the increase, the company’s total equity may increase, or the allocation of equity among its components may change. In a paid-in capital increase, new funds are provided by shareholders or investors, whereas in a bonus capital increase, eligible internal resources of the company are transferred to share capital.
Why Is a Capital Increase Important?
Companies may need additional financing for various reasons while carrying out their operations. Increasing production capacity, opening new branches, making technological investments, and covering operating expenses are among the main reasons for these needs. Meeting such needs solely through bank loans and other borrowing methods may increase the company’s interest expenses and repayment obligations. A capital increase, particularly through the paid-in method, can help strengthen the company’s financing structure by providing additional equity.
The main factors that make a capital increase important are as follows:
Strengthening the company’s equity structure
Financing new investments and growth plans
Improving the balance between debt and equity
Meeting working capital requirements
Contributing to the management of financial risks
Supporting the company’s long-term operations
How Is a Capital Increase Carried Out?
A capital increase consists of specific stages that vary depending on the company’s legal structure and the method of capital increase. To complete the process correctly, the company must adopt the necessary resolutions, prepare the required documents, fulfill the obligations applicable to the type of capital involved, and complete the registration procedures.
1. Identifying the Need for a Capital Increase
At the initial stage, the company determines why it wants to increase its capital and how much additional capital it needs. During this assessment, the company’s current financial statements, debts, cash flow, investment plans, and future financing requirements are reviewed. The aim is to ensure that the capital increase is carried out at an amount appropriate to the company’s actual needs.
2. Selecting the Capital Increase Method
After identifying the need for a capital increase, the company decides which method to apply. If the company intends to obtain new cash contributions from its shareholders, it may consider a paid-in capital increase. If the company has retained earnings from previous years or eligible reserves that can be added to share capital, a bonus capital increase may be considered. It is also necessary to assess whether the capital will be contributed in cash or in kind.
3. Adopting the Company Resolution
An appropriate resolution must be adopted in accordance with the company’s legal structure. In joint-stock companies operating under the authorized capital system, a general assembly resolution is the primary method for increasing capital. In companies operating under the registered capital system, the board of directors may adopt a resolution where permitted by applicable legislation and the articles of association. In limited liability companies, a capital increase is carried out through a resolution of the general assembly of shareholders, within the scope of its non-delegable powers. During the resolution process, the amount of the capital increase, the status of the new shares, the method of financing the capital, and any necessary amendments to the company’s articles of association are determined.
4. Funding the Capital and Making Payments
In a paid-in capital increase, the obligations relating to the payment of the newly subscribed capital must be fulfilled. For cash capital increases, applicable legislation may require a certain portion of the capital to be paid before registration. As a general rule for joint-stock companies, at least one-quarter of the subscribed cash capital must be paid before registration, while the remaining amount must be paid within 24 months following registration. The relevant capital subscription and payment provisions must also be taken into account for limited liability companies. Bank documents and proof of payment are prepared after verifying whether they are required for the specific transaction. It should not be assumed that the same documentation and payment procedures apply to every capital increase.
5. Preparing the Required Reports and Documents
Various documents may need to be prepared during a capital increase, depending on the type of company and the nature of the transaction. These may include general assembly or board of directors resolutions, amended articles of association, documents relating to capital subscriptions, bank letters, and, where necessary, reports prepared by certified public accountants or other financial professionals. If the capital is contributed in kind, specific legal provisions apply to the valuation of real estate, machinery, vehicles, and other assets. Where required, valuations must be carried out by experts appointed by the court.
6. Applying to the Trade Registry and Completing Registration
Once the necessary resolutions and documents have been prepared, an application is submitted to the relevant trade registry directorate. The application file is reviewed according to the type of company and the capital increase method. The legal effects of the capital increase arise upon registration. Any required announcements are also completed in accordance with the applicable legislation. It should not be assumed that a capital increase is completed merely by adopting a resolution. The required registration and announcement procedures are important for the validity of the transaction and its legal effect on third parties.
What Are the Types of Capital Increases?
Capital increases are classified into different types depending on the source of the capital and the method applied. The most common methods are paid-in capital increases and bonus capital increases.
What Is a Paid-in Capital Increase?
A paid-in capital increase is a process in which a company raises capital from its existing shareholders or, to the extent permitted by applicable legislation, from new investors by issuing new shares. Under this method, the company's capital is increased through new capital commitments made by shareholders or through the participation of investors. Once the committed capital is paid, the company's financing resources may be strengthened. Paid-in capital increases are generally preferred to finance new investments, increase working capital, reduce debt, or support the company's growth plans.
The main characteristics of a paid-in capital increase are as follows:
It aims to provide the company with a new source of capital.
Legally permissible methods may include issuing new shares or increasing the nominal value of existing shares.
Existing shareholders' pre-emptive rights to subscribe for new shares are assessed within the framework of applicable legislation and company resolutions.
The company's equity may be strengthened through the accounting recognition of the capital received.
Shareholding percentages may change depending on the extent to which shareholders participate in the capital increase.
What Is a Pre-emptive Right in a Paid-in Capital Increase?
A pre-emptive right is the right of existing shareholders to subscribe for newly issued shares as a priority during a paid-in capital increase. This right helps shareholders maintain their existing ownership percentages in the company. However, matters such as the exercise, duration, transfer, or restriction of pre-emptive rights must be assessed in accordance with the applicable legislation and the company's legal structure.
What Is a Bonus Capital Increase?
A bonus capital increase is a process in which a company increases its capital by transferring eligible internal resources to its share capital in accordance with applicable legislation. Under this method, shareholders are not required to provide additional cash. Retained earnings, eligible reserves, or other internal resources permitted to be added to share capital may be used. In a bonus capital increase, the company's total equity does not increase solely as a result of transferring internal resources to share capital. Instead, the composition of the items within equity changes.
The main characteristics of a bonus capital increase are as follows:
No new cash contributions are obtained from shareholders.
Eligible internal resources are transferred to the share capital account.
The company's total equity does not change solely as a result of this transfer.
Bonus shares may be distributed to existing shareholders in proportion to their holdings.
The number of shares and the theoretical share price may be adjusted according to the capital increase ratio.
Which Resources Are Used in a Bonus Capital Increase?
The resources that can be used for a bonus capital increase are limited to those permitted under the applicable legislation. These may include retained earnings, reserves eligible for transfer to share capital, share premiums, and other qualifying equity items. The use of accounts such as positive differences arising from capital adjustments must also be assessed within the framework of the applicable legislation and accounting rules. It should not be assumed that every equity item can be transferred directly to share capital. Before the transaction, the nature and availability of the relevant account, as well as the applicable reporting requirements, must be checked.
Disadvantages of Capital Increases and Points to Consider
In addition to their advantages, capital increases may also result in costs, legal obligations, and changes to the ownership structure.
Changes in Shareholding Ratios: If existing shareholders do not participate equally in a paid-in capital increase, their ownership percentages may change. If some shareholders do not subscribe for the new shares, other shareholders may increase their ownership stakes in the company.
Transaction and Advisory Costs: Expenses may arise during the capital increase process due to trade registry procedures, announcements, required reports, valuation services, and professional advisory services. These costs vary depending on the type of company and the scope of the transaction.
Restrictions on the Use of Internal Resources: The internal resources used in a bonus capital increase must comply with applicable legislation. Not every profit or reserve account recorded in the company's accounting records can be added to share capital without conditions.
Incorrect Capital Planning: Increasing capital by an amount that is either lower or higher than necessary may adversely affect financial planning. Therefore, cash flow forecasts, investment budgets, and potential financial risks should be analyzed before making a decision.
How Is a Capital Increase Carried Out According to the Type of Company?
The decision-making mechanism and documentation requirements applicable to capital increases vary depending on the type of company. The relevant legislative provisions must be examined separately for joint-stock companies, limited liability companies, and publicly traded companies.
Capital Increases in Joint-Stock Companies
In joint-stock companies, capital increases are carried out according to the capital system to which the company is subject. Under the authorized capital system, a capital increase is decided upon within the authority of the general assembly. Where necessary, the articles of association are amended, and the registration procedures are completed. In joint-stock companies that have adopted the registered capital system, the board of directors may increase capital within the limits specified by law and the company's registered capital ceiling. To exercise this authority, the conditions stipulated by the applicable legislation and the articles of association must be met. During capital increases in joint-stock companies, matters such as pre-emptive rights to subscribe for new shares, payment of the capital, and preparation of the required documents must also be assessed on a case-by-case basis.
Capital Increases in Limited Liability Companies
In limited liability companies, capital increases fall within the non-delegable powers of the general assembly of shareholders. The decision-making and quorum requirements specified in the Turkish Commercial Code and the company's articles of association must be observed. Article 621 of the Turkish Commercial Code provides for qualified majority requirements for certain important decisions. Therefore, it is important to verify the applicable quorum for a capital increase resolution in light of the content of the resolution and the provisions in force. Following the adoption of the resolution, the necessary amendments are made to the company's articles of association, the relevant documents are prepared, and the application to the trade registry is completed.
Capital Increases in Publicly Traded Companies
Capital increases in publicly traded companies are subject not only to the provisions of the Turkish Commercial Code but also to the regulations of the Capital Markets Board of Türkiye (CMB) and the relevant capital markets legislation. Depending on the circumstances, these companies may use methods such as paid-in capital increases, bonus capital increases, and private placements. Depending on the method, a prospectus and an issuance document, an application to the CMB, public disclosure obligations, and other regulatory procedures may be required. Capital increases through private placements are not exclusive to publicly traded companies. Non-public joint-stock companies may also be permitted to allocate shares to specific persons within the framework allowed by the applicable legislation. Therefore, when planning a capital increase in a publicly traded company, both company law and capital markets regulations must be considered together.
Points to Consider in Accounting Records
The following matters should be taken into account when recording a capital increase in the company's accounts:
Verifying the capital increase resolution and registration documents
Properly tracking capital commitments and payments made against them
Distinguishing between paid-in and bonus capital increases
Confirming that internal resources are eligible for transfer to share capital
Ensuring that accounting records are consistent with statutory books and financial statements
Retaining the required documents and reports
Conclusion
A capital increase is an important method that companies can use to strengthen their financial structure, meet investment needs, and support long-term growth objectives. While a paid-in capital increase aims to provide the company with new funding, a bonus capital increase enables eligible internal resources to be transferred to share capital. Selecting a method appropriate to the company's type, financial position, and capital increase objectives is important for managing the process correctly. Financial analysis must be conducted at the decision-making stage, the necessary legal procedures must be completed, and accounting records must be prepared accurately. A capital increase is not merely a matter of increasing the amount of share capital. When properly planned, it can contribute to the company's financing structure, investment capacity, and long-term sustainability. However, before each transaction, the company's needs and the provisions of the applicable legislation must be assessed together.
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