CAPITAL INCREASE

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It is one of the ways to bring a new partner into your company. A capital increase is understood as an operation aimed at increasing your company's own resources in order to be able to undertake new investments or due to financing needs, in order to bring in new partners.

COMPANIES CAN INCREASE THEIR CAPITAL IN THREE DIFFERENT WAYS

• Issuing new shares.
• By increasing the nominal value of existing shares.
• By charging the company's retained earnings - the reserves - in which case shareholders will not have to contribute any money and will receive bonus (free) shares.

TYPES OF CAPITAL INCREASES

Shares can be issued at par, i.e. for the nominal value of the new shares, but they can also be issued above par, so that investors who wish to participate in the increase must pay an additional amount, which is added to the company's reserves and is called share premium. The issue of shares below par, i.e. below par value, is prohibited.

When a company increases its capital under the first system - at par - it increases the number of shares in circulation, which decreases the book value of each share, i.e. the company is worth the same but is divided among more shares. This is known as the dilution (see TIP). To avoid such an effect, a share premium is usually required, so that the new shareholders also pay for the company's reserves, of which they also become owners.

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RELEASED ENLARGEMENTS CAN BE:

Fully, in which case the shareholders do not have to make any outlay - the money is taken from the company's reserves. Partially, when the shareholder has to pay out a part of the increase that is not covered by balance sheet reserves. The idea that the Fully paid up capital increases are a way to remunerate the shareholder may be misleading, since, although he receives a number of free shares, the value of the company remains unchanged and therefore the total value of the shares remains the same, even though there are now more shares in circulation.

EXAMPLE OF A CAPITAL INCREASE

A public limited company has 2,000,000 shares with a nominal value of 20 euros. It has reserves of 8,000,000 euros. The company's capital is: 2,000,000 x 20 = 40,000,000 euros.

The notional value of a share shall be equal to the amount of capital plus reserves, divided by the number of shares:

VTaction = (40.000.000 + 8.000.000.000)/2.000.000.000 = 48.000.000/2.000.000.000 = 24 euros.

If the company decides to increase its capital by 4,000,000 euros and does so at par, it would issue 200,000 new shares (4,000,000/20).

The new theoretical value of a share would be as follows:

VTaction = (40,000,000 + 8,000,000 + 4,000,000)/(2,000,000 + 200,000) = 52,000,000/2,200,000 = 23.64 euros.

The above-mentioned dilution effect would therefore occur.

To avoid this effect, it would be necessary to require new shareholders to pay a share premium:

VTaction = (40,000,000 + 8,000,000 + 4,000,000 + share premium)/2,200,000 = 24 euros.

It follows from the above that the total share premium should be 800,000 euros, which implies 4 euros for each of the new shares issued.

The new value of the share would be:

Vaction = 52,800,000/2,200,000 = 24 euros, the same as before the capital increase.