Turkey: Is Capital Increase A Straight Forward Process?

Last Updated: 13 January 2014
Article by Sezil Şimşek

Capital increase within Turkish equity companies is considered as a straight forward process, which is actually a complete misperception.

The basic procedures are followed in accordance with the provisions of the Turkish Commercial Code. In other words, as a part of these basic procedures, the general assembly meeting of shareholders should convene and resolve to amend the articles of association of the company. Solely the registered capital system embraced companies may increase capital through adopting a board resolution.

Such resolutions are subject to registration before the trade registry office where the headquarters of the company is located. At the time of this registration application, a report certifying the full payment of the previous capital and prepared by a certified public accountant or independent accountant or auditor for companies subject to independent audit should also be submitted.

Such report is also necessary to reflect the financial status of the company. Based on such financial status, the capital increase may be either feasible or not practical at all. On the basis of this, it is essential to question certain matters before deciding on a capital increase and therefore the companies are recommended to be aware of the below:

  1. Is there any internal fund in the company that may be capitalized and are all shareholders intending to increase the capital?

Article 462 of the Turkish Commercial Code stipulates capital increase by way of adding internal funds of the company.

As is known, in order for an injection via capital subscription, the amount of the existing shares must be fully paid-up and in addition to this, there should be no funds in the balance sheet of the company, which may be capitalized. If existing, such funds must be capitalized at first. The funds that may be capitalized are exemplified in the Turkish Commercial Code's preamble as funds of re-valuation, subsidiary and immovable sales revenues, and inflation difference accounts.

Such rule is necessary for joint stock companies as a type of equity companies and not a compulsory rule for limited liability companies.

Although it is required in the first place to capitalize the internal funds at the time of a capital increase in joint stock companies, the general assembly of shareholders may resolve to directly & only proceed with a cash injection provided that all shareholders are present in the general assembly meeting and their resolution is adopted unanimously. This exception sort of stipulation is brought by the Ministry of Customs and Trade's Circular dated January 25, 2013 and relieved the companies.

  1. Could the capital amounts be used until the registration?

Another essential point to be considered at the time of the capital injection is the blockage practice of the Turkish banks on the capital amounts sent by foreign shareholders.

As to the Circular of Central Bank of the Turkish Republic numbered 2013/YB-7 and also taking Article 345 of the Turkish Commercial Code into account, the amounts sent by foreign shareholders in order for a capital increase are blocked and tracked in the bank accounts until the registration of the capital increase before the relevant trade registry office. In consequence of this, the amounts sent for this purpose are not able to be used until the completion of the registration of the new capital.

The registration period is envisaged as three months as of the adoption of the resolution according to Article 456 of the Turkish Commercial Code. If the registration process may not be completed within this three months period, the resolution adopted in this respect becomes invalid and the banks will then be required to send those amounts back to their owners as per Article 345 of the Turkish Commercial Code. For this purpose, the companies having the intention of increasing their capital should approach with caution to the amounts to be sent and used.

  1. Is company in the technical insolvency situation?

Another matter to be questioned for a capital increase is whether the company intending to increase its capital is in the technical insolvency situation as per Article 376 of the Turkish Commercial Code. This Article 376 refers to capital losses with a view to consider the loss ratio. For instance, if a company lost its half capital and legal reserves, the general assembly should convene and discuss the curative actions. Else, if a company lost its capital and legal reserve's two thirds, the general assembly should decide to continue with the one thirds of the capital or to complete the capital or otherwise the company shall deem automatically terminated. Last of all, if the company starts to give signs as insolvent, the company is required to issue an interim balance sheet taking into account the potential sales amounts of its existing assets on the basis of companies' continuity principle. If still the assets of the company cannot be positioned to cover the debts of the company, the board should notify the commercial court at the address of the company's headquarters of this issue and request its bankruptcy.

In light of this Article, the companies having such positions should proceed with the mentioned steps and cannot increase their capital right away. An option to increase the capital under such circumstances can be transferring a loss compensation fund into the company in the first place. By this way, unsecured capital of the company may become stronger and be replenished and thereafter the capital may be increased and registered to the relevant trade registry office in Turkey. At this point, the companies must be aware of the recent tax rulings given by the Ministry of Finance stating that the loss compensation funds should be treated as an income in corporate tax calculations; even it is not directly recorded to the income statement. Although the tax rulings do not mention VAT, it is also possible for such to be criticized for VAT purposes as well.

Conclusion

Considering the above crucial criteria, companies must make an assessment before deciding to increase their capital and understand the necessary actions and outcomes.

Based on such assessment, companies may realize that the time determined to increase their capital may not be a perfect one. In the upcoming days, internal funds, technical insolvency situations and the use of sent & blocked amounts will be more important as there have been certain financial fluctuations in Turkey, which may also affect the financial status of the companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Sezil Şimşek
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