Capital Increase in All Aspects

Capital companies such as Limited Liability Companies (Ltd. Şti.) and Joint Stock Companies (A.Ş.) are required to have capital. The minimum capital amounts are 250,000 TL for Joint Stock Companies and 50,000 TL for Limited Liability Companies.

When we treat companies as independent entities, these entities have their own income and expenses independently of their partners and managers, and they need money to pay their expenses.

The company issues shares and sells these shares to individuals who wish to become partners. During the establishment phase, partners contribute money (capital) to the company in exchange for shares, and the company covers its expenses with this capital.

What is a capital increase?

A company may reach a point where it cannot meet its payments due to reasons such as collection difficulties, rapid growth, or investments.

In this case, it can obtain the cash it needs by borrowing from its partners or securing a bank loan.

This obtained cash can meet its short-term needs.

As the company realizes post-sales collections, it can pay off these debts. However, if the cash flow is insufficient to close these debts and more cash is needed, a capital increase will be necessary.

In this case, the company will issue new shares in addition to existing shares and sell these shares to existing partners or individuals who wish to become new partners.

This type of capital increase provides additional resources to the company and does not create a repayment obligation. A capital increase can be a paid-in capital increase (from external sources - cash, waiver of receivables, grants, etc.) or a bonus capital increase (from internal sources - past year profits, inflation adjustments, emission premiums). A paid-in capital increase provides new resources to the company and increases the company's value, whereas a bonus capital increase does not create a change in the company's value; it has no direct valuation effect on the company.

For example;

While the company equity is 1,000,000 TL (capital of 100,000 TL and other of 900,000 TL), if there is a paid-in (from external sources) injection of 4,000,000 TL, the company's value increases by 4,000,000 TL. In this case, the company's valuation before and after the investment differs.

While the company's equity is 1,000,000 TL (100,000 TL capital and 900,000 TL other), in the event that it increases its capital to 600,000 TL through bonus shares (from internal sources), the company's value does not change. Because the total equity will still remain as 1,000,000 TL (600,000 TL capital and 400,000 TL other).

How is a capital increase performed?

To perform a capital increase, it is necessary to know the following processes and act accordingly.

Under certain conditions, the board of directors calls for the General Assembly meeting and publishes this call in the Trade Registry Gazette.

Company partners determine the capital amount required in the General Assembly.

Under certain conditions, a ministry representative attends the General Assembly.

Under certain conditions, the board of directors may restrict the pre-emptive rights of shareholders.

The cash amount to be increased is deposited into the bank, blocked, and a "bank blockage" letter is obtained from the bank.

The Independent Accountant Financial Advisor (CPA) / Certified Public Accountant (YMM) determines the pre-increase capital amount and drafts a report.

If there is a non-cash increase, the CPA/CPA determines these amounts and drafts a report.

If capital is to be contributed in kind, an expert determines this and drafts a report.

This resolution and its annexes are registered in the trade registry.

The trade registry may request additional information and documents based on the complexity of the capital increase.

(Ministry authorization letter, board of directors declaration, pre-emptive right restriction, board of directors report in case of issuing new shares with a premium, participation commitment letter)

For What Purpose is a Capital Increase Carried Out?

Every company may have different reasons for undertaking a capital increase.

The company may have a cash need; it may want to make debt and salary payments, or enter new markets.

Of course, alongside these, it may also undertake a capital increase for reasons such as making investments, increasing capacity, building a factory, and financing R&D projects.

Is a capital increase necessary?

A capital increase is not legally mandatory.

However, commercially, in situations where the company needs cash, partners may need to contribute additional capital.

If the company's equity is less than its capital by a certain amount, the company is considered to be in a "technically bankrupt" (over-indebtedness) status.

In this case, the board of directors invites partners to the General Assembly to remedy the over-indebtedness and calls for a capital increase.

If the company can pay its debts (if partners lend to the company) and suppliers, vendors, banks, or the tax office collect their receivables on time, over-indebtedness may not be a problematic situation.

Many companies in the market continue their operations with the support of their partners despite being over-indebted.

What are the Types of Capital Increase?

There are two types of capital increase methods; paid-in capital increase (cash and in-kind) and bonus capital increase.

While additional cash enters the company's coffers in a cash capital increase, no cash enters in a bonus capital increase.

Cash Capital Increase

Cash capital increase is carried out by following specific steps regulated by the Turkish Commercial Code and Capital Markets Board (CMB) regulations.

The process starts with a company management decision. The board of directors invites shareholders to the General Assembly.

If the company is a publicly traded company, it must apply to the CMB.

After the CMB examines and approves the company's preparations, the process continues.

New cash inflow is provided through a cash capital increase to finance company activities or evaluate growth opportunities.

This process can occur with the contributions of existing shareholders or the provision of capital by new investors.

With a cash capital increase, companies can invest in new projects, close their debts, or strengthen working capital.

In-Kind Capital Increase

An in-kind capital increase is the increase of company capital not through cash inflow, but through movable or immovable assets such as property, real estate, intellectual property, and machinery.

The company may resort to an in-kind capital increase to strengthen its capital structure.

What is a Bonus Capital Increase?

Bonus capital increase: the company's capital is met through internal resources, and no cash or assets enter the company from the outside.

In the bonus capital increase transaction, new shares are issued free of charge without requesting any fee from company shareholders; this provides a positive benefit to the increase in the paid-in capital of the company.

A question like "How does a bonus capital increase affect the stock in the stock market?" might come to mind.

However, let us state that a bonus capital increase does not change the company's value.

How is the value of the company determined?

The value of the company is not determined solely by the capital amount or equity.

The company's value depends on many factors such as market size and development potential, future growth opportunities, technological advantages, market dominance, competitor strength, partner harmony, and team competence.

While some companies may have a value lower than their equity, others may be valued well above their equity.

What should the value of each share/stock be?

In joint stock companies, the nominal value of shares can be any amount; the value of a share can be 0.01 TL as well as 1,000,000 TL.

However, in limited liability companies, the value of each share must be multiples of 25 TL.

The market price of the share/stock depends on the factors we mentioned earlier.

There are usually significant differences between nominal value and market value.

What is capital blockage?

In cash capital increases, one-fourth of the increased amount must be deposited into the bank before capital registration and must be blocked until capital registration is completed.

The company cannot use this money until the capital increase is registered, but after registration, the blockage is lifted, and the money can be used freely.

Emission premiums must also be deposited into the bank and blocked before capital registration.

Compared to the capital that must be paid at a rate of one-fourth of the capital amount, all emission premiums must be paid before registration.

Called General Assembly

In cases where all partners cannot attend the General Assembly in joint stock companies, an announcement is published in the Trade Registry Gazette prior to the General Assembly meeting.

This announcement includes the date, time, address, and agenda of the General Assembly.

Additionally, a proxy template is also included for those who cannot attend the General Assembly.

Restriction of the Pre-Emptive Right

In capital increases, the board of directors or shareholders can restrict the pre-emptive right and prevent shareholders from participating in the capital increase.

Company partners can participate in any capital increase they wish by paying the nominal value of the share (without emission premium), which is the inherent right of shareholders (pre-emptive right).

In some cases, the company may want to issue its shares with an emission premium or take on new partners.

In such cases, the participation of existing shareholders in the capital increase may be restricted.

What are the Documents Required for Capital Increase?

Depending on the types of capital increase, some of the following information and documents must be prepared:

"Petition" addressed to the Trade Registry

Notarized "General Assembly resolution" and its "annexes"

Notarized "attendance sheet" or the original

For the General Assembly where a ministry representative must be present, the ministry representative "appointment letter"

"Permission letter" if permission must be obtained from the ministry and other institutions

"Board of directors declaration" pursuant to TCC Art. 457

"Report on the determination of the payment of capital" approved by CPA or YMM

If the capital increase is met from internal resources, CPA and YMM "determination reports"

If an in-kind capital increase is made, "expert appointment decision", "expert report", and the "original court decision" regarding the approval of the expert report

"Board of directors report" regarding the restriction of the pre-emptive right and its justifications

"Competition Authority share payment" corresponding to four ten-thousandths of the capital

"Bank blockage letter" for cash capital increases

In Which Cases Does a Capital Increase Become Mandatory?

If the balance sheet structure of the company is over-indebted, the company must increase its capital in a way that gets it out of this situation.

A minimum capital requirement can be imposed by law for the execution of certain businesses.

In such cases, if the company capital falls below the minimum capital determined by law, it becomes mandatory to make a capital increase.

How does a capital increase affect the stock price?

If the capital increase is made as paid-in (cash or in-kind), since additional resources will enter the company, the value of the company increases, and the stock price rises.

In the case of a bonus capital increase, since there will be no additional resource inflow into the company, the company's value does not change.

However, since there will be more shares for the same total capital, the stock price drops.

Still, because your number of shares increases, the total value of your investment does not change.

What Opportunities Are Available for Investors in a Capital Increase?

If the capital increase is made as paid-in, thanks to the additional resources entering the company, the company's value increases, the debt burden decreases, and financial stability is ensured.

The growth of the company is supported with these resources.

Additionally, shareholders who will not participate in the capital increase can generate additional income by selling their pre-emptive rights on the stock exchange.

In this case, since ownership ratios will decrease, "dilution" occurs.

The interest of new investors may also increase.

In the case of a bonus capital increase, the number of shares held by the shareholder increases without any additional cash coming out of their pocket.

However, while the number of shares increases, the stock price drops, so the total value of the investment does not change.

What is the General Assembly meeting ministry representative?

During a capital increase, in some cases, an officer from the Ministry of Industry and Technology attends the company's General Assembly meeting.

This representative observes the meeting and signs the relevant documents together with the authorities.

The official does not interfere with the decisions to be made, but audits whether the decisions comply with the laws and whether the necessary approvals have been obtained.

It is mandatory to have a ministry representative present in some general assemblies. This is necessary to protect shareholder rights.

For example, in joint stock companies, if there are multiple partners or if a capital increase is made, the ministry representative is present at the General Assembly.

However, this obligation does not exist in year-end routine general assemblies or board of directors elections.

What is an emission-premium capital increase?

The capitals of companies are represented by shares/stocks.

For example, for a company with 1,000,000 TL of capital and 1,000,000 shares, the nominal value of each share is 1 TL.

However, the market value of the company can be much higher depending on various factors.

If the company's market value rises to 100,000,000 TL, the market price of each share becomes 100 TL.

If the company issues new shares at 100 TL, an additional revenue of 99 TL is obtained for each share with a nominal value of 1 TL.

This positive difference is called the "emission premium" and is not subject to tax.

The emission premium is important for protecting the ownership ratios of shareholders who do not participate in the capital increase (reduces the dilution effect).

When an emission-premium capital increase is made, participating partners must pay the emission premium in addition to the nominal value.

For example, if a partner participating in a 10% capital increase needs to pay 10,000,000 TL, the breakdown of this amount (1,000,000 TL capital, 9,000,000 TL emission premium) must be determined and stated in the description section of the payment.

Can company capital be queried?

Yes, company capitals can be queried from the Trade Registry Gazette.

While partner information can be viewed in detail in limited liability companies, the capital structure and partner information of joint stock companies are not publicly available and therefore cannot be viewed in trade registry records.

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