Blog Details

Right shares & bonus shares

  • By: Avinash Garg (Financial Planner)
  • 30 Apr, 2020

Right Issue
A rights issue is an issue of rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a way to raise capital. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time.

A rights issue is directly offered to all shareholders of record or through broker-dealers of record and may be exercised in full or partially. Subscription rights may either be transferable, allowing the subscription-rightsholder to sell them privately, on the open market, or not at all. The price at which the shares are offered is usually at a discount to the current share price, which gives investors an incentive to buy the new shares — if they do not, the value of their holding is diluted.

Advantages

  • More control over existing shareholders because the right shares are issued to the existing shareholder, so there is no risk of losing control of existing shareholders. Existing shareholders’ share will increase in a company and they can decide without any compromise with the principles of the company. It is very helpful to achieve the missions of the company.
  • No loss to existing shareholders by issuing shares to existing shareholders, the value of the share will increase due to stability in controlling the power of the company. So, there will not be any loss to existing shareholders with the right shares.
  • No cost for issuing shares to the public-company has not to give an invitation to the public,  so advertising costs and another new issue cost will decrease with the right shares.
  • Helpful to increase the goodwill of the company is also a way to increase the goodwill and reputation of the company in the industry.
  • Capital formation company can get capital at any time without any delay because the company can easily issue of shares to existing shareholders just sending the right shares to offer notice.
  • More scientific distribution technique of right shares issue is more scientific. Not all shares will get by single shareholders but it will be in the proportion of existing shares which is in the hand of old shareholders at this time.
Disadvantages
  • The value of each share will be diluted as a result of the increased number of shares issued.
  • It is awfully easy for investors to get tempted by the prospect of buying discounted shares with a rights issue. But it is not always a certainty that you are getting a bargain. But besides knowing the ex-rights share price, you need to know the purpose of the additional funding before accepting or rejecting a rights issue.
  • A rights issue can offer a quick fix for a troubled balance sheet, but that doesn't necessarily mean management will address the underlying problems that weakened the balance sheet in the first place.
Steps For Issuing Right Share

  1. Right shares must be in the ratio of equity shares of existing shareholders.
  2. Right shares will be issued with 15 days' notice. This notice will be offered. Existing shareholders can either accept or reject this offer.
  3. Right shares issues must not be opened more than 60 days under SEBI guidelines.
The provision of 81 will not apply to a private company. This rule will not also apply on the conversion of debentures into shares.

Bonus Shares
Bonus shares are additional free shares issued to the shareholder by the company. Profitable Companies in India issue Bonus Shares. These are additional shares issues given the shareholder without any cost to existing shareholders.
Free shares of stock given to current shareholders, based upon the number of shares that a shareholder owns. While this stock action increases the number of shares owned, it does not increase the total value. This is because, since the total number of shares increases, the ratio of a number of shares held to several shares outstanding remains constant.

When Can a Company Issue Bonus Share
Some conditions need to be satisfied before issuing Bonus shares

1) Bonus shares can be issued by a company only if the articles of association of the company authorizes a bonus issue.
2) It must be sanctioned by shareholders in general meeting on recommendations of BOD of company.
3) Guidelines issued by SEBI must be complied with. Care must be taken that issue of bonus shares does not lead to total share capital more than the authorized share capital. Otherwise, the authorized capital must be increased by amending the capital clause of the memorandum of association.
4)If the company has availed of any loan from the financial institutions, prior permission is to be obtained from the institutions for the issue of bonus shares.
5)If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the board to issue bonus shares immediately after the board meeting.
6)Where the bonus shares are to be issued to the non-resident members, prior consent of the Reserve Bank should be obtained.
7)Only a fully paid-up bonus share can be issued. Partly paid-up bonus shares cannot be issued since the shareholders become liable to pay the uncalled amount on those shares.