Every company requires financial resources to expand its operations. If a joint-stock company intends to launch a new production line, expand its branches, purchase new equipment, or improve its financial structure, a capital increase may serve as an appropriate legal mechanism for raising the necessary funds.
Simply put, a capital increase refers to an increase in a company’s registered capital. This process enables the company to obtain additional financial resources or align its registered capital with its actual financial position. A capital increase is not merely a financial decision; it must be carried out in accordance with the provisions of Iranian commercial law. For this reason, the legislator has established specific procedures to protect the rights of shareholders and third parties dealing with the company.
Under Iranian law, the authority to decide on a capital increase rests with the Extraordinary General Meeting of Shareholders. The Board of Directors cannot independently approve a capital increase unless the Extraordinary General Meeting has delegated such authority to the Board within the limits prescribed by law.
Methods of Increasing Capital in Joint-Stock Companies
Capital increases are commonly undertaken to finance business expansion, implement new projects, attract investors, improve the company’s financial structure, or reduce debt. As such, they represent one of the most significant financial and legal decisions during a company’s lifetime.
To this end, Article 157 of the Bill for Amendment of a Portion of the Iranian Commercial Code provides for two principal methods of increasing capital:
- Increasing capital through the issuance of new shares;
- Increasing the nominal value of existing shares.
A) Capital Increase Through the Issuance of New Shares
This is the most common method of increasing capital in Iran. Under this approach, the company issues new shares, and the company’s capital increases through the subscription of those shares.
The issuance of new shares may be financed through various sources, including the following:
- Capital Increase Through Cash Contributions
Under this method, existing shareholders or new investors pay cash in exchange for newly issued shares.
For example, a company seeking additional funding to expand its operations may issue new shares and raise the required capital through their sale.
This is generally the only method that results in new funds being injected directly into the company.
- Capital Increase Through Conversion of Shareholder or Creditor Claims
In some cases, individuals may be creditors of the company. For instance, a shareholder may have lent money to the company or acquired a claim through commercial transactions.
Instead of receiving repayment, the creditor may agree to receive newly issued shares. As a result, the company’s liabilities decrease while its capital increases.
- Capital Increase Through Retained Earnings
This is one of the most common methods used by profitable companies.
Retained earnings are profits that have not been distributed among shareholders and remain within the company.
For example, if a company has generated profits over several consecutive years but has retained a portion of those profits rather than distributing them as dividends, it may convert those retained earnings into capital and allocate new shares to existing shareholders.
Under this method, no new cash enters the company because the relevant funds are already available within the company.
- Capital Increase Through Reserves
Companies may maintain certain reserves as part of their financial resources. In some circumstances, these reserves may be converted into capital.
It should be noted, however, that Iranian law only permits the conversion of certain reserves. The statutory reserve may not be converted into share capital.
- Capital Increase Through Share Premium
A company may issue new shares at a price higher than their nominal value.
For example, if the nominal value of each share is IRR 1,000, the company may offer those shares for IRR 3,000. The difference between the nominal value and the offering price is known as a share premium.
In accordance with applicable legal requirements, the share premium may be used for capital increase purposes or other corporate objectives.
- Capital Increase Through Asset Revaluation
In recent years, this method has become increasingly popular among Iranian companies.
Under this approach, the company revalues its assets—such as land, buildings, machinery, and equipment—based on their current market value. Consequently, the value of the company’s assets reflected in its financial statements increases, leading to an increase in registered capital.
Importantly, this method does not result in the injection of new cash into the company. The increase arises solely from the revaluation of existing assets.
B) Capital Increase Through Increasing the Nominal Value of Shares
The second method of capital increase involves raising the nominal value of existing shares.
The nominal value of a share is the value assigned to each share in the company’s articles of association.
For example, if the nominal value of each share is IRR 1,000, the company may decide to increase it to IRR 2,000.
In such cases, shareholders are generally required to pay the difference between the old and new nominal values. As a result, this method is less frequently used in practice. Whenever this approach imposes a new financial obligation on shareholders, the consent of all shareholders is required.
What Is the Shareholders’ Preemptive Right to Subscribe for New Shares?
One of the most important rights of shareholders during a capital increase is the preemptive right to subscribe for newly issued shares.
This right means that when new shares are issued, existing shareholders have priority over third parties in purchasing those shares. The purpose of this right is to prevent shareholders’ ownership percentages from being diluted without their consent.
For example, if a shareholder owns 20 percent of the company’s shares, the law allows that shareholder to participate proportionately in the capital increase so that the same ownership percentage can be maintained.
Key features of the preemptive right include:
It is granted in proportion to the number of shares held by each shareholder;
It may be transferred to another person;
A shareholder may choose not to exercise it;
The statutory period for exercising the right is at least sixty days.
In some situations, a company may need to issue new shares directly to a strategic investor or business partner. In such cases, the Extraordinary General Meeting may wholly or partially remove existing shareholders’ preemptive rights. However, such a decision must comply with the relevant legal procedures and be based on reports prepared by the Board of Directors and the company’s inspector(s).
Legal Procedure for Increasing Capital
A capital increase involves a multi-step legal process, and a simple shareholder decision is not sufficient to complete it.
Step One: Proposal by the Board of Directors
The process generally begins with a proposal by the Board of Directors. The Board must explain the necessity of the capital increase, the amount required, and the proposed method.
Step Two: Review by the Inspector
The company’s inspector or inspectors must review the Board’s proposal and provide their opinion.
Step Three: Approval by the Extraordinary General Meeting
The final decision regarding the capital increase is made by the Extraordinary General Meeting of Shareholders.
Step Four: Notification of Shareholders
Following approval, the company must inform shareholders of the terms of the capital increase, the number of new shares, and the manner in which preemptive rights may be exercised.
Step Five: Share Subscription
Where new shares are issued, eligible persons may subscribe for those shares.
This process is legally referred to as share subscription.
Step Six: Registration of the Capital Increase
Once all legal requirements have been fulfilled, the capital increase must be registered with the Companies Registration Office.
Until registration is completed, the legal effects of the capital increase are not fully realized.
Step Seven: Amendment of the Articles of Association
After registration, the new capital amount must be reflected in the company’s articles of association, and the relevant information must be published for public notice.
Required Documents for Registration of a Capital Increase
To register a capital increase in a joint-stock company, the following documents are generally required:
The original minutes of the Extraordinary General Meeting;
The capital increase declaration;
A bank certificate confirming payment of the capital increase amount (where cash contributions are involved);
The original notice convening the meeting, if all shareholders were not present;
Documents relating to non-cash contributions and their valuation, where applicable.
Common Mistakes in Capital Increase Procedures
Many legal issues arising from capital increases are caused by failure to comply with statutory requirements. Common mistakes include:
Attempting to increase capital before the previous capital has been fully paid;
Failure to respect shareholders’ preemptive rights;
Deficiencies in notices and shareholder communications;
Improper valuation of non-cash contributions;
Failure to register the capital increase within the prescribed period;
Failure to amend the articles of association following the capital increase.
These mistakes may result in rejection of the registration application, disputes among shareholders, or even legal proceedings.
Conclusion
A capital increase is one of the most important tools available to joint-stock companies for financing growth and expansion. Iranian commercial law establishes detailed rules governing this process in order to protect shareholders and ensure transparency in corporate activities.
The most appropriate method of capital increase depends on each company’s financial condition and business objectives. In some cases, a cash contribution may be the most suitable option, while in others, retained earnings or asset revaluation may provide a more effective solution.
Given the importance of complying with the applicable legal requirements, companies should seek specialized legal and corporate advice before undertaking a capital increase in order to minimize risk and ensure an efficient and legally compliant process.
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