What Are Capital Increases in Business

Google+ Pinterest LinkedIn Tumblr +

A capital increase involves increasing the subscribed capital as part of equity of a corporation, that is, the share capital in a public or private entity and thus constitutes the counterpart to the capital reduction. Capital increase can be implemented through capitalization of reserves, or feed made from new equity.

A capital increase may be necessary if a change is instituted to the legal status of a company, expansion of company operations, e.g, attained through a major investment (owner’s own funds) rather than a loan. A capital increase may also be necessited by an improvement in the credit standing of the company or due to lower debt levels.

The expression capital increase has very little significance in places such as the United Kingdom and the United States, as compared to raise/inject capital or equity financing.

Basically there are four forms of capital rights issues, with which existing shareholders have pre-emptive rights to a share in the capital (i.e. the purchase of new and additional shares) received. This allows the existing shareholders to keep their percentage share of the corporation at the same state and not subject to the dilution effect.

The other three forms of capital pertain to normal capital (without subscription rights, also called cash offer), open and offers, and private placement.

Often associated with a capital increase is the issue of bonus shares through which the share capital without the dilution effect is broken down into more shares (stock split), thereby reducing the share price and the subscription price of new shares. This is in addition to more liquid and easier purchase options for small shareholders who want to invest very small amounts, especially based on psychological reasons.

The ordinary capital is also called a capital increase against contributions, similar to the increase of the share capital by contribution of members / shareholders or by issue of new shares. A minimum of three-quarter majority of the share capital represented at the shareholders meeting shall decide a capital increase through a vote.

There are several possible ways available to carry out a capital increase, and these include the block trade, the third variant (accelerated book building process), and the classic book building process (opens late in the allocation of new shares).

A seasoned equity offering or secondary equity offering constitutes a fresh equity issue by a publicly traded firm. In this context, secondary offerings could entail shares that are disposed by existing shareholders, they can also be new shares (dilutive) or both.
 

Share.

About Author

Leave A Reply