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.