A capital increase is a financial operation through which an entity tries to raise funds among its shareholders and other investors. A capital increase by a company is generally due to an interest on the part of a company to raise funds to achieve its objectives.
A capital increase is a financial operation through which an entity tries to raise funds among its shareholders and other investors. A capital increase by a company is generally due to an interest on the part of a company to raise funds to achieve its objectives. These objectives can be as diverse as financing new investments, acquiring competitors or other companies, paying off debt or, in the case of financial companies, strengthening their capital ratios.
- Increasing the par value of old shares.
- Charged to profit reserves.
- By issuing new shares. It is the most common form and the one that concerns us, since it is the one that can affect the small shareholders of an entity.
There are many key elements when it comes to understanding and analysing a capital increase by issuing new shares:
Subscription Rights: are necessary to acquire the new shares to be issued by the company. As soon as the process begins, each former shareholder receives subscription rights. In the vast majority of cases, the shareholder receives a subscription right for each old share.
Number of new shares: the company that carries out the capital increase determines the number of shares to be issued. Logically, the greater the amount of capital that the company wants to raise, the greater the number of shares that it is going to issue must be.
Proportion: is a fundamental element in any capital increase. This concept indicates the number of subscription rights necessary to be able to acquire a new share at the agreed price. If a transaction is carried out with a ratio of 5 to 1, it means that the shareholder who wants to buy a new share must have 5 rights. Therefore and from the point of view of the company, this ratio means that the company wants to increase the capital by one share for every 5 old shares.
Price of new shares: this concept is closely linked to the previous one. The company determines in advance the price that new shareholders will have to pay to buy a new share. Depending on the price of the new shares, the extension can be of different types:
- At par: The price of the new shares is higher than the par value of the old shares.
- With premium: The price of the new shares is in line with the par value of the old shares.
- Discounted: The price of the new shares is less than the par value of the old shares.
Share price after the distribution of rights: As we know, from an accounting point of view, rights work in a very similar way to dividends. Their price is discounted from the share price. The difference is that in this case we do not know the price of the rights. The price of the share after the distribution of the rights can be known in advance and for this we must apply the following formula:
C = ((AA * PA) + (AN * PN)) / (AA + AN);
Where:
- C is the price of the share after the distribution of rights,
- AA the number of old shares that the company has.
- PA is the closing price of the old shares before the day of distribution of the rights.
- AN is the number of new shares issued by the company.
- PN is the price required by the company to acquire a new share.
Theoretical value of the subscription rights: to obtain this information, simply subtract the price of the share after the distribution of the rights from the closing price. In the example above simply apply the following formula:
VT = PA-C;
Where,
- VT is the notional value of the subscription rights.
- PA is the closing price of the old shares before the day of distribution of the rights.
- C is the price of the share after the distribution of rights.
Duration of the operation: although this concept can vary according to the country and the company, the total duration of the operation lasts between three and five weeks. Capital increases begin with the distribution of rights to old shareholders and end when the new shares are listed on the market.
Share price after the capital increase: once the process has finished, the market does not distinguish between old and new shares. They all trade at the same price. The price of the share after the capital increase will be equal to the price of the share after the distribution of the rights plus any market fluctuations that may take place after that session. Although these fluctuations may be infected by the volatility of the operation, the reality is that from the accounting point of view they will be totally unrelated to it.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.
