What is a Capital Increase with Share Premium?

One of the most common methods companies use to grow, invest, or strengthen their financial structure is capital increase. Among the available options, a capital increase with share premium stands out as a strategic choice. But what exactly does this mean, and what advantages does it offer to companies?

What is a Share Premium?

A share premium refers to the difference between the nominal (par) value of newly issued shares and the higher price at which they are sold. Under Turkish Commercial Code, the nominal value of shares in a joint stock company is typically a fixed amount—such as 1 TL per share. However, when increasing its capital, a company may issue these shares at a higher price. The difference between the nominal value and the sale price is called the share premium (or “emission premium”).

How Does It Work?

In a capital increase with share premium, investors pay not only the nominal value of the shares but also the additional premium amount. For example, if a share with a nominal value of 1 TL is sold for 5 TL:

• 1 TL is added directly to the company’s capital,
• The 4 TL difference is recorded as share premium under “capital reserves” in the equity section of the balance sheet.

This approach strengthens not only the company’s capital but also its overall equity structure.

Why Do Companies Choose Share Premium Capital Increases?

• Preserves Company Valuation: Since shares are sold closer to market value rather than nominal value, the company’s valuation is maintained.
• Minimizes Shareholder Dilution: The higher price per share helps protect existing shareholders from significant dilution.
• Increases Cash Inflow: A larger cash injection is made into the company’s equity, improving liquidity and funding capacity.
• Builds Investor Confidence: Selling shares above nominal value signals financial strength and market confidence in the company.

Tax and Accounting Implications

Under Turkish tax legislation, share premiums are not considered taxable income. Therefore, they do not create a tax burden for the company. In accounting, they are tracked under “Capital Reserves > Share Premiums”, strengthening the equity section of the balance sheet.

Conclusion

A capital increase with share premium is a strategic option for companies aiming to grow, attract investment, or maintain their valuation. It not only solidifies the company’s financial foundation but also presents a strong and transparent financial image to potential investors.