Why and How to Increase Share Capital

Share capital is the total value of shares owned by shareholders in a company. It represents the initial investment made by shareholders when they purchase shares of the company. Increasing share capital can have several benefits for a company, such as providing funds for expansion, increasing company value, and improving the financial health of the company. In this article, we will explore why and how to increase share capital.

There are several reasons why a company might choose to increase its share capital. Firstly, it provides a way to raise funds for expansion and growth. When a company wants to invest in new projects, acquire assets, or expand its operations, it requires additional capital. By increasing share capital, the company can raise funds from existing shareholders or invite new investors to purchase shares. This influx of funds can be used to finance the company’s growth plans and take advantage of new opportunities.

Secondly, increasing share capital can enhance the company’s value and attractiveness to potential investors. A larger share capital indicates that the company has a strong financial position and is capable of attracting more investment. It also provides a measure of assurance to stakeholders that the company has enough resources to meet its obligations and pursue its objectives. This increased confidence can lead to an increase in the company’s share price, thereby benefiting existing shareholders.

Furthermore, increasing share capital can also improve the company’s financial health. When a company issues new shares, it increases its equity, which in turn strengthens its balance sheet. This boost in equity can enhance the company’s creditworthiness and make it easier for the company to secure loans or attract new investors. Additionally, a higher share capital can lead to improved liquidity, as it increases the number of shares available for trading in the market.

Now that we understand the benefits of increasing share capital, let’s explore how a company can go about doing it. There are primarily two methods through which a company can increase its share capital: through a rights issue or by issuing new shares to the public.

In a rights issue, existing shareholders are given the opportunity to purchase additional shares in proportion to their existing holdings. This allows the company to raise funds from its loyal shareholders who believe in its growth prospects. The advantage of a rights issue is that it rewards existing shareholders while also raising much-needed capital for the company.

Alternatively, a company can choose to issue new shares to the public through an initial public offering (IPO) or a follow-on public offering (FPO). An IPO is when a company offers its shares to the public for the first time, while an FPO is when a company issues additional shares to the public after it has already gone public. These offerings allow the company to attract new investors and raise capital from a wider pool of potential shareholders.

In conclusion, increasing share capital can provide several advantages for a company, including funds for expansion, increased company value, and improved financial health. It is a strategic move that can help fuel growth and attract new investors. Whether through a rights issue or by issuing new shares to the public, companies have various methods to increase share capital and harness its benefits. By carefully evaluating their financial needs and goals, companies can decide on the best approach to increase share capital and pave the way for future success.