Legal regulations on the transfer of capital surplus sources

Capital surplus refers to the difference between the issuance price and the par value of stocks and plays a crucial role in the capital structure of an enterprise. The transfer of capital surplus sources serves purposes such as increasing charter capital or offsetting accumulated losses, and must comply with current legal regulations. In this article, NPLaw invites readers to explore the legal framework governing the transfer of capital surplus sources.

I. Understanding the transfer of capital surplus sources 

The transfer of capital surplus involves adjusting and reallocating the excess capital (surplus) arising from stock issuance or capital contributions exceeding par value, for financial purposes such as increasing charter capital, covering losses, paying stock dividends, or transferring to other funds in accordance with the law. 

Such transfers are typically executed based on resolutions of the General Meeting of Shareholders or decisions of the Board of Directors, and must comply with current accounting and financial regulations to ensure transparency and legality, and accurate reflection of the company’s financial position. 

II. Legal provisions on the transfer of capital surplus sources 

1. When is it necessary to transfer capital surplus sources?

According to Point đ, Clause 1, Section A, Part II of Circular No. 19/2003/TT-BTC, capital surplus may be transferred when an enterprise intends to increase its charter capital by reallocating from surplus sources (undistributed profits or reserve funds).

2. Conditions for transferring capital surplus sources 

Pursuant to Point 2, Section A of Circular No. 19/2003/TT-BTC, the transfer of capital surplus to increase the charter capital of a joint-stock company must satisfy the following conditions:

- If all treasury shares have been sold, the company may use the entire net gain (the difference between the selling price and the original cost) to increase charter capital;

- If treasury shares remain unsold, only the remaining difference after deducting the original cost of unsold treasury shares can be used to increase charter capital;

- If the total cost of unsold treasury shares equals or exceeds the capital surplus, increase in charter capital isn’t allowed from this source;

- Capital surplus from stock issuance for investment projects may only be used to increase charter capital after three (03) years from the date the project is completed and put into operation;

- Capital surplus only be used to increase charter capital after 1 year from the end date of issuance to restructure debt or supplement business capital;

- When used to increase charter capital, capital surplus must be distributed in the form of stocks to existing shareholders in proportion to their current shareholding.

Thus, the transfer of capital surplus must strictly adhere to the above provisions to ensure transparency and legal compliance in the financial operations of a joint-stock company and to prevent avoidable violations.

3. Procedures for transferring capital surplus sources 

According to Point 2, Section A of Circular No. 19/2003/TT-BTC and Article 59 of Circular No. 200/2014/TT-BTC, the procedures include:

Step 1: Identifying and classifying the capital surplus source
- Capital surplus course may arise from: 

+ The difference between the issuance price and the par value of stocks;

+ The difference between the selling price and the original cost of treasury shares;

+ Surplus from stock issuance for implementing investment projects, restructuring debt or supplementing business capital.

Step 2: Preparing a dossier

+ Proposal by the Board of Directors regarding the use of capital surplus sources to increase charter capital;

+ Resolution of the General Meeting of Shareholders approving the capital surplus transfer and stock issuance to increase charter capital;

+ Audited financial statements;

+ Stock issuance plan (if applicable).

Step 3: Performing the accounting

+ Account for reduction in account 4112 – Capital Surplus.

Step 4: Registering the change in charter capital
- If the transfer increases the charter capital, the enterprise must submit a dossier for enterprise registration change to the Department of Planning and Investment. The dossier includes:

+ Notice of change to enterprise registration content;

+ Resolution and minutes of the General Meeting of Shareholders/Board of Directors;

+ Updated list of shareholders (post-capital increase);

+ Financial statements reflecting the capital source.

III. Questions on the transfer of capital surplus sources 

1. Is it permissible to transfer capital surplus sources to increase charter capital?

A joint-stock company may legally transfer capital surplus to increase its charter capital, pursuant to Point đ, Clause 1, Section A, Part II of Circular No. 19/2003/TT-BTC. This method is legally recognized, alongside others such as issuing new shares, converting bonds, or paying dividends in shares.

2. What is the significance of transferring capital surplus sources?

Transferring capital surplus to increase charter capital is a vital financial strategy. It enables a company to expand its capital base without external fundraising, thereby strengthening financial capacity and increasing credibility with partners, banks, and investors. Moreover, it facilitates bonus share issuance to existing shareholders, enhances share attractiveness, and encourages long-term investment. However, to ensure transparency and legality, such transfers must meet all legal conditions.

3. What factors influence the transfer of capital surplus sources?

Several factors affect the decision to transfer capital surplus, including:

- Financial state: Companies with stable and substantial surplus can reinvest or expand operations;

- Investment strategy: Growth-oriented companies will use surplus capital for investment opportunities, while others may retain capital;

- Macroeconomic environment: Interest rates, exchange rates, and inflation can affect investment decisions and capital surplus transfer;

- Shareholder expectations: Shareholders' demands for dividends or investments in specific projects may influence such a decision;

- Market risks: Volatile markets may encourage caution in deploying surplus funds;

- Opportunity costs: Enterprises shall consider the benefits of investing new projects against alternative uses.

Thus, transferring capital surplus is a strategic decision influenced by multiple factors. Enterprises should evaluate these thoroughly to optimize returns and ensure sustainable development. 

4. Under what circumstances is capital surplus transfer permitted under current law?

As per Point đ, Clause 1, Section A, Part II of Circular No. 19/2003/TT-BTC, such transfer is permitted when a company wishes to increase its charter capital using surplus sources.

5. Is approval from financial authorities required for transferring capital surplus sources?

Currently, there is no legal requirement for financial authorities to approve surplus transfers for charter capital increases. These decisions are handled internally by the General Meeting of Shareholders or the Board of Members and must comply with the Law on Enterprise and relevant financial disclosures.

6. How might capital surplus transfers impact financial planning for the following year?

Capital surplus transfers can significantly influence financial plans for the following fiscal year. If it is transferred to reserves or specific financial objectives, they may improve the organization's financial state. However, if the surplus transfer is not carefully managed, it can change forecasts and spending plans for the following year, especially if the funds are used for purposes other than those originally planned. This can lead to changes in financial ọbjectives and affect the achievement of long-term financial goals.

IV. Legal consulting services on the transfer of capital surplus sources

The above article by NPLaw outlines the legal aspects of transferring capital surplus sources. With a team of seasoned lawyers and legal specialists, NPLaw is ready to accompany, advise, and support clients on all legal matters related to capital surplus transfers. For further assistance, please contact us: