Increasing Charter Capital With Capital Surplus In A Private Joint Stock Company

The concept of Capital Surplus is quite prevalent within private joint stock companies (those that are not public companies). When a Joint Stock Company issues additional shares with a fixed Par Value (usually VND 10,000/share) which will be offered to increase its charter capital, the Selling Price of such shares may deviate from the Par Value. Such deviation represents the Capital Surplus.

In accordance with the regulations laid out in Circular 19/2003/TT-BTC, which provides guidance on the increase and reduction of charter capital and management of treasury shares of Joint Stock Companies, the Capital Surplus may be carried forward to increase the charter capital of a Joint Stock Company specifically as follows:

• The Joint Stock Company may only use the difference between the Selling Price and the Par Value of shares issued for executing investment projects to increase its Charter Capital 03 years after such investment projects are completed and put into operation.
• The Joint Stock Company may only use the difference between the Selling Price and the Par Value of shares issued for restructuring debts or supplementing business funds to increase its Charter Capital 01 year after the end of the issuance.

* Capital Surplus formula:

Capital Surplus = (Selling Price – Par Value) x Quantity of shares per issuance

* Formula to calculate the quantity of additional shares issued to increase the Charter Capital:

The quantity of shares issued to increase the Charter Capital shall be distributed to existing shareholders according to their share ownership ratios.

However, the 2020 Law on Enterprises does not specify the case where a Joint Stock Company can increase its Charter Capital by carrying forward its Capital Surplus. A Joint Stock Company can only increase its Charter Capital by the following methods:

(i) Share offering to existing shareholders (Article 124);

(ii) Private placement (Article 125);

(iii) Public offering in accordance with securities law (Clause 3 of Article 123);

(iv) Distributing shares as dividends (Clause 6 of Article 135).

Pursuant to regulations of the 2020 Law on Enterprises as mentioned above, various provincial-level Departments of Planning and Investment do not approve applications for increasing Charter Capital by carrying forward Capital Surplus, regardless of the explicit regulations in Circular 19/2003/TT-BTC, which are currently in effect. On the other hand, on April 17, 2023, the Ministry of Finance issues the Official Dispatch No. 3755/BTC-TCDN appealing for comments on the draft circular which will entirely annul Circular 19/2003/TT-BTC. If this circular is adopted by the Ministry of Finance, there will be no regulations applicable to Private Joint Stock Companies allowing the carrying forward of Capital Surplus to increase their Charter Capital.

In contrast to Private Joint Stock Companies, Public Companies have a solid legal basis for utilizing Capital Surplus to increase their Charter Capital. In practice, many provincial-level Departments of Planning and Investment have approved such applications. Under Article 62 of Decree 155/2020/ND-CP detailing the implementation of a number of articles of the Law on Securities, Public Companies may issue shares to increase their capital from their equity (capital surplus, development investment funds, post-tax undistributed profits, and other funds).

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