Capital Increases and Rights: Tracking Codal to Share Conversion
Fundai Education Team · · 5 min read
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Capital increases and rights issues in plain language: types of capital increase, the formula for the number and theoretical value of rights with a numerical example, the price fluctuation range of rights, and the stages on Codal.
Capital increases and rights issues (pre-emptive rights) mean that the company increases its number of shares and gives each shareholder, in proportion to the shares they hold, the right to buy the new shares ahead of others at a nominal value of 1,000 rials. In this guide you will see what types of capital increase there are, how a pre-emptive right is calculated and converted into a share, and where on Codal to follow each step.
What is a capital increase and what types are there?
A capital increase means a rise in the company's registered capital and, as a result, in its number of shares. The key question is where the money for the increase comes from, because only in one method does the shareholder have to pay money and receive a rights issue entitlement.
| Source of the capital increase | What does the shareholder receive? | Does the shareholder pay new money? |
|---|---|---|
| Retained earnings and reserves | Bonus shares | No |
| Asset revaluation surplus | Bonus shares | No |
| Cash contribution and conversion of matured debts | Rights to buy new shares (pre-emptive rights) | Yes, 1,000 rials for each right |
| Share premium | The option to buy shares at a price above par value | Yes, at the amount stated in the subscription notice |
In a capital increase from retained earnings or revaluation, the company merely transfers an amount from one equity line item to the capital line item. No new money enters the company, and the new shares are credited to the shareholder's account free of charge. Pre-emptive rights arise only in the cash contribution and conversion of matured debts method.
What is a rights issue entitlement (haq-e taqaddom) and how is it calculated?
Haq-e taqaddom (pre-emptive right) is the right a company gives its existing shareholders, in a capital increase from cash contributions, to buy the new shares ahead of others at the nominal value of 1,000 rials. The number of rights each shareholder receives depends on the number of shares held and the percentage of the capital increase from cash contributions.
Number of rights
Amount payable (rials)
The share price falls after a capital increase, because the same company is now divided among more shares. The theoretical price of the share after the general meeting and the theoretical value of each right are calculated as follows; write percentages as fractions, for example 50% as 0.5.
Theoretical share price after the capital increase (rials)
Theoretical value of each right (rials)
The theoretical price is only a starting point. The price at which rights trade in the market is set by supply and demand, and it can be higher or lower than the theoretical value.
What is the price fluctuation range for rights issues?
A pre-emptive right (rights issue) has the same percentage price fluctuation range as its underlying share. The fluctuation range is set by the board of the Securities and Exchange Organization by resolution, and its resolutions set it for "shares and pre-emptive rights to shares" together and identically. In Mehr 1405, the fluctuation range for shares and pre-emptive rights on the Tehran Stock Exchange and the first and second markets of Iran Fara Bourse is plus and minus 3%.
This figure changes with decisions of the Securities and Exchange Organization. See today's permitted price ceiling and floor for each pre-emptive right symbol on that symbol's page on the Tehran Stock Exchange Technology Management Company (TSETMC) website.
How do you follow the stages of a capital increase and rights issue on Codal?
Every capital increase has several announcements in a row on the Codal system. Search for the company's name and find these announcements in this order:
Board of directors' proposal The company announces the percentage of the capital increase and its source, and publishes the justification report.
Legal inspector's report The inspector gives an opinion on the justification report.
Securities and Exchange Organization permit The Securities and Exchange Organization grants permission to hold a meeting for the capital increase.
Extraordinary general meeting Shareholders approve the capital increase. After the meeting, the stock symbol reopens at an adjusted price.
Subscription announcement In the cash contribution method, the company announces the deadline for exercising the rights issue and the account number. Under Article 166 of the Bill to Amend Part of the Commercial Code, this deadline is not less than 60 days.
Capital increase registration notice After registration, the paid rights are converted into shares and can be sold in your portfolio.
Before deciding on a rights issue, look at the company's financial position as well. On each company's page in Fundai, we show the balance sheet, retained earnings and financial ratios alongside the figure for the whole industry; the Fundai user guide shows where each report is located.
What happens if you do not use your rights?
Until the subscription deadline ends, a shareholder has three options: pay the 1,000 rials per right to convert it into a share, sell the right on the market, or do nothing.
If you do nothing, after the deadline the company offers the unused rights on the market, and the sale proceeds, after deducting the 1,000 rials per right and costs, are paid to the shareholder. The timing and method of payment are stated in that company's announcement on Codal.
Does a capital increase from retained earnings carry a right?
No. In a capital increase from retained earnings or reserves, the shareholder pays nothing and receives bonus shares; rights are issued only in capital increases from cash contributions and from matured claims.
When can the new shares resulting from a right be sold?
After the capital increase registration notice is published on Codal and the paid-up rights are converted into shares. Until then, the right itself trades under its own separate symbol.
Is a high capital increase percentage a good sign for the company?
Not by itself. The source and purpose of the capital increase in the justification report, and the company's financial position in its financial statements, give a more accurate picture. Past data does not guarantee the future.
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