What is a Bonus Capital Increase and Why is it Important?
What Does "Company Issues Free of Charge" Mean? A company's issuance of shares free of charge means that it is increasing its capital free of charge.
What is a Free of Charge Capital Increase?
A free of charge capital increase is a capital increase in which a company distributes shares issued in exchange for a capital increase from its internal resources to its shareholders without receiving any compensation. While a paid-in capital increase involves external funds entering the company, a free-of-charge capital increase is not funded by internal resources. Article 462 of the Turkish Commercial Code states the following regarding capital increases from internal sources:
Capital Increase from Internal Sources
ARTICLE 462- (1) Capital may be increased from internal sources by converting into capital reserves allocated by the articles of association or a general assembly resolution and not allocated to a specific purpose, freely usable portions of legal reserves, and funds permitted by law to be included on the balance sheet and added to the capital.
(2) The existence of the amount covering the increased portion of the capital from internal resources within the company is verified by the approved annual balance sheet and a clear written statement from the transaction auditor. If more than six months have passed since the balance sheet date, a new balance sheet must be prepared and approved by the transaction auditor.
(3) If the balance sheet contains funds permitted by law to be added to the capital, the capital cannot be increased by committing capital without converting these funds into capital. Capital can be increased by both converting these funds into capital and committing capital at the same time and in the same proportion. The increase is finalized by the registration of a general assembly or board of directors resolution and the registration of an amended version of the relevant articles of the articles of association. Upon registration, existing shareholders automatically acquire bonus shares based on the ratio of their existing shares to the capital. The right to bonus shares cannot be removed or restricted; this right cannot be waived.
How is the price calculated in a bonus capital increase?
New Price = Old Price / (1 + (Bonus Rate / 100))
During a bonus issue, the share price decreases, but the total market value remains unchanged. For example, if a share has one million shares outstanding and the price is 10 TL, a 100% bonus issue increases the number of shares to two million, and the price drops to 5 TL. In this case, the shareholder's holdings remain unchanged. However, a decrease in price can sometimes create a psychological feeling of cheapness in the stock market. However, the share price remains unchanged based on adjusted prices. Therefore, the expectation that a bonus issue will result in a price decrease, attracting more buyers, and the price rises.
Will the Share Price Rise or Not After a Bonus Issue?
This doesn't mean that a company's share price will always increase if it issues a bonus issue. However, it has been observed many times in the market that bonus issues create such an expectation, especially during bull markets. Since there's no underlying reason, and this situation is observed solely for psychological reasons, investing in a stock solely based on the possibility of a bonus share capital increase is not a conscious choice.
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