Business & Entrepreneurship
JUN 23, 2025
6 mins read
6 mins readWhat is a Capital Increase? Why Is It Done?
In today’s competitive business world, companies must have a robust capital structure to survive and achieve sustainable growth. At this point, capital increase becomes a critical financial tool, frequently used by companies to enhance their economic strength and capitalize on new opportunities. So, what is a capital increase, why is it done, and what are the differences between rights issues and bonus issues? In this article, we provide a clear and thorough explanation of capital increases, step by step, including what it means for both investors and companies.
What is a capital increase?
Capital increase, a key part of companies’ growth strategies, is a method used by a company to increase its current capital and finance its operations, take advantage of growth opportunities, or pay off its debts. Capital refers to the resources committed by shareholders during the establishment or operation of a company. A capital increase strengthens the company’s financial structure by increasing these resources. In publicly traded companies, capital increases are carried out through the issuance of new shares to shareholders, while in private companies, they occur through partners’ contributions. Capital increase can be preferred for creating resources for new investments, reducing existing debt, or increasing market value. It can be performed in two ways: through a rights issue (paid) or a bonus issue (free of charge).
Why is a capital increase done?
Some of the reasons why companies increase their capital are:
Financial growth and expansion
Companies increase capital to obtain the financial support needed to achieve growth and development goals. Entering new markets, expanding product and service lines, or investing in technology all require additional resources. A capital increase provides the necessary funds for such strategic investments and enhances the company’s competitiveness.
Debt repayment and improving financial structure
Over time, companies may need to repay accumulated debts or reduce their debt ratios. A company with a high debt burden can create resources through a capital increase to minimize the impact of debt on its operations. This enables companies to lower their debt ratios, mitigate financial risk, and enhance investor confidence.
Financing new investments
To build new facilities, acquire equipment, or renew existing infrastructure, companies need significant financial resources. Capital increases are critically crucial for providing the necessary financing for such projects.
Strategic partnerships and acquisitions
Capital increase can also be used to form strategic partnerships or acquire other companies. Companies may resort to capital increases to meet the substantial funding needs associated with such strategic moves.
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What is a rights (paid) capital increase?
A rights capital increase occurs when a company raises funds by soliciting cash contributions from its existing shareholders or new investors to increase its existing capital. This type of capital increase allows companies to meet financing needs without resorting to external funding. During this process, companies issue new shares and offer them for sale at a predetermined price. When used strategically, rights issues can support the company’s growth while serving the long-term interests of shareholders.
What is a bonus (free) capital increase?
A bonus capital increase is a crucial tool for companies to strengthen their capital structures and create value for investors without requiring any payment from existing shareholders. In this process, the company increases its capital using internal resources, such as capital reserves, retained earnings, or share premiums. It distributes new shares to existing shareholders at no additional cost.
What are the differences between paid and bonus capital increases?
In a paid capital increase, external resources, such as existing shareholders or new investors, contribute, aiming to increase equity. In this method, the company issues new shares and sells them at a rights price, thereby receiving a significant cash inflow. In a bonus capital increase, no external funding is required. The company distributes free new shares to existing shareholders using its retained earnings, share premiums, or similar internal resources. The company receives no cash in this process; it is purely an internal transaction on the balance sheet. In summary, a paid increase generates external cash, while a bonus increase converts internal resources into capital. In one, the company receives cash; in the other, it doesn’t. In a paid increase, share prices adjust according to market dynamics; in a bonus issue, share prices are directly reduced, though the total value remains unchanged.
Frequently Asked Questions:
1. What is liquidity?
Liquidity refers to an asset's ability to be quickly converted into cash without incurring a significant loss in value. In financial markets, liquidity refers to the ease with which an investment instrument can be bought or sold.
2. What is a pre-emptive right?
In a rights (paid) capital increase, shareholders may use their pre-emptive rights. This right gives shareholders the privilege to purchase newly issued shares before others, allowing them to maintain their ownership ratio in the company. Shareholders may either exercise this right to acquire new shares or transfer the right to others.
The information presented in this blog is intended for general informational purposes only and does not constitute legal, financial, or investment advice. It is prepared to provide guidance and is not intended to be binding. For personalized recommendations, consult a professional advisor. All decisions made based on this content are at your own risk, and Papel Electronic Money and Payment Services Inc. assumes no responsibility in this regard.