COMPANY ACCOUNTS
Right Issue and Bonus Issue
Right Share
A rights issue
is an invitation to existing shareholders to purchase additional new shares in
the company. This type of issue gives existing shareholders securities called
rights. With the rights, the shareholder can purchase new shares at a discount
to the market price on a stated future date. By rights issue the company is
giving shareholders a chance to increase their exposure to the stock at a
discount to the market price.
As per Section
62(1) of the Companies Act, 2013, where at any time, a company having a share
capital proposes to increase its subscribed capital by the issue of further
shares, such shares shall be offered to persons who,
at the date of the offer, are holders of equity shares of the company
in proportion, as nearly as circumstances admit, to the paid-up share capital
on those shares by sending a letter of offer subject to the following
conditions, namely:—
a.
the
offer shall be made by notice specifying the number of shares offered and
limiting a time not being less than fifteen days and not exceeding thirty days
from the date of the offer within which the offer, if not accepted, shall be
deemed to have been declined;
b.
unless
the articles of the company otherwise provide, the offer aforesaid shall be
deemed to include a right exercisable by the person concerned to renounce the
shares offered to him or any of them in favour of any other person; and the notice
referred to in (a) above shall contain a statement of this right;
c.
after
the expiry of the time specified in the notice referred to in (a) above, or on
receipt of earlier intimation from the person to whom such notice is given that
he declines to accept the shares offered, the Board of Directors may dispose of
them in such manner which is not disadvantageous to the shareholders and the
company.
Theoretical value of a right
Definition of 'Theoretical value of a
right'
It is the calculated value of a subscription right. It is the theoretical value of a right
during the cum-rights period (Cum-rights period is the interval after the announcement
of the rights offering but before the stock trades on an ex-rights basis).
The theoretical value of a right is also known as
the intrinsic value of a right.
Formula for determining the theoretical value
of a right
Theoretical value of a right =
(Cum-rights
market price per share − Subscription price per right share) / (No. of rights
required to buy one share + 1)
Example
If the current
market price (i.e. cum-right market price) is Rs 20, the subscription or
exercise price is Rs 15, and 4 rights are required to buy one share, the
theoretical value of a right would be:
(Rs 20 – Rs
15) / (4 + 1) = Rs 1.
ALTERNATIVE METHOD FOR CALCULATING
THE THEORETICAL VALUE OF A RIGHT
STEP: 1
Theoretical ex-right market price per
share =
(Cum-right
market value of the existing shares + Subscription value of the right shares) /
(Number of existing shares + Number of right shares)
STEP: 2
Theoretical value
of a right =
Cum-right market price per share − Theoretical ex-right market price per
share
Bonus Share
A bonus share is a free share issued without any consideration to an
existing shareholder in the ratio of number of shares held by that shareholder.
Issue of Bonus share decreases the Reserve & Surplus and Increases the
issued capital but does not bring any change in cash flow and net worth.
Issue of bonus
shares is a way of capitalizing profits
or reserves:
(a)
by
paying up amounts unpaid on existing partly paid shares so as to make them
fully paid up shares, or
(b)
By
issuing fully paid bonus shares to the existing members/equity shareholders.
Sources for fully
paid-up bonus shares:
As per Section 63(1) of the Companies Act, 2013, a company may issue
fully paid-up bonus shares to its members out of –
i.
Its
Free Reserves;
ii.
the
Securities Premium Account; or
iii.
the Capital
Redemption Reserve Account
But no issue of bonus shares shall be made
by capitalising reserves created by the Revaluation of Assets i.e. Revaluation
Reserves.
Meaning of Free Reserves
As per Sec 2(43) of the Companies Act, 2013,
"Free reserves" means such reserves which,
as per the latest audited balance sheet of a company, are available for
distribution as dividend:
Provided that –
i. any amount representing unrealised
gains, notional gains or revaluation of assets, whether shown as a reserve or
otherwise, or
ii. any change in carrying amount of an
asset or of a liability recognized in equity, including surplus in profit and
loss account on measurement of the asset or the liability at fair value,
-
Shall not be treated as free reserves.
Examples of Free Reserves
Examples of free reserves for bonus issue are:
1. Capital Reserve (realised in cash only),
2. Dividend Equalisation Reserve,
3. General Reserve,
4. Profit and Loss Account (credit balance).
Conditions for issue of fully paid-up bonus
shares [SEC 63(2)]
1. A company can issue bonus shares if its Articles
expressly authorise to do so.
2. A resolution is required to be passed by the Board of
Directors recommending its decision to issue bonus shares.
3. A resolution is required to be passed by the members
in the general meeting to approve the Board’s resolution recommending the issue
of bonus shares. Members’ resolution —
(a)
Must
have an intention to capitalize the profits or reserves, and
(b)
Must
mention the amount of profits or reserves to be capitalized.
4. The company has not defaulted in payment of interest
or principal in respect of fixed deposits or debt securities issued by it.
5. The Company has not defaulted in respect of payment of
statutory dues of the employees such as contribution to provident fund,
gratuity and bonus.
6. The partly-paid shares, if any, outstanding on the date of allotment are made fully paid-up.
7. A Company must comply with the Prescribed Conditions.
8. The bonus shares shall not be issued in lieu of
dividend.
SEBI guidelines on issue of bonus issues:
A listed company proposing to issue bonus shares shall comply with the
following requirements:
1.
The
articles of association of the company must contain a provision for capitalisation
of reserves, etc; If there is no such provision in the articles the company
must pass a resolution at its general meeting making provision in the articles
of association for capitalization;
2.
The
company has not defaulted in payment of interest or principal in respect of
fixed deposits and interest on existing debentures or principal on redemption;
3.
The
company has not defaulted in payment of statutory dues of the employees such as
contribution to provident fund, gratuity etc.
4.
The
partly-paid shares, if any, outstanding on the date of allotment are required
to be made fully paid-up.
5.
(a) No company shall, pending conversion of
FCDs/PCDs, issue any by way of bonus unless similar benefit is extended to the
holders of such FCDs/though reservation of shares in proportion to such
convertible part of FCDs or PCDs.
(b)
The
shares so reserved may be issued at the time of conversion(s) of such
debentures on the same terms on which the bonus issues were made.
6.
The
bonus issue shall be made out of free reserves built out of the genuine profits
or securities premium collected in cash.
7.
Reserves
created by revaluation of fixed assets shall not be capitalised.
8.
The
declaration of bonus issue, in lieu of dividend, shall not be made.
9.
A
company which announces its bonus issue after the approval of the Board of
directors must implement the proposal within a period of 15 days from the date
of such approval (if Shareholders’ approval is not required) or 2 months (if
Shareholders’ approval is required).
10.
Once
the decision to make a bonus issue is announced, the same cannot be withdrawn.
Part B
Illustration: 1
National
Transport Limited has an issued capital of 20000 equity shares of Rs 10 each
fully called up. The following decisions are taken by the company:
1.
To
forfeit 100 shares on which Rs 5 per share has been paid up and to re-issue
these shares at Rs 15 per share as fully paid up.
2.
To
issue right shares in the ratio of 1 fully paid up shares for every 4 existing
shares held at Rs 15 per share.
Assuming that the company has sufficient balance in general reserve show
the recording of the above decisions when executed through journal entries.
Solution: 1
Illustration: 2
A Company is planning to raise funds by making rights issue of equity
shares to its existing equity shareholders to finance its expansion. The
existing equity share capital of the company is Rs 50, 00,000. The market price
of its share is Rs 42 per share. The company offers to its shareholders the
right to buy 2 shares at Rs 11 each for every 5 shares held. You are required
to calculate:
i.
Theoretical
market price after rights issue;
ii.
The
value of rights; and
iii.
Percentage
increase in share capital.
Solution: 2
Illustration: 3
Following items appear in the Trial Balance of Magnanimous Ltd. as at
31.3.2015:
|
Particulars |
Rs |
|
60,000 Equity Shares of Rs 10 each |
6,00,000 |
|
Capital Redemption Reserve |
45,000 |
|
Plant Revaluation Reserve |
15,000 |
|
Securities Premium Account |
52,500 |
|
General Reserve |
1,50,000 |
|
Profit and Loss Account |
75,000 |
|
Capital Reserve (including profit on sale of machinery Rs 37,500) |
1,12,500 |
The company decided to issue bonus shares to its shareholders at the
rate of one share for every four shares held.
Required:
Pass the necessary journal entries. It is desired that there should be
minimum reduction in free reserves.
Solution: 3
Illustration: 4
Following is the extract of the Balance Sheet of YoungYalies Ltd. as at
31.3.2015:
|
Particulars |
Rs |
|
Authorised Capital: |
|
|
15,000 12% Preference Shares of Rs 10 each |
1,50,000 |
|
1,50,000 Equity Shares of Rs 10 each |
15,00,000 |
|
Total |
16,50,000 |
|
Issued and Subscribed
Capital: |
|
|
12,000 12% Preference Shares of Rs 10 each fully paid up |
1,20,000 |
|
1,35,000 Equity Shares of Rs 10 each, Rs 8 paid up |
10,80,000 |
|
Reserves and Surplus: |
|
|
Capital Redemption Reserve |
30,000 |
|
General Reserve |
1,80,000 |
|
Capital Reserve |
1,12,500 |
|
Securities Premium |
37,500 |
|
Profit and Loss Account |
2,70,000 |
|
Secured Loans: |
|
|
12% Partly Convertible Debentures @ Rs 100 each |
7,50,000 |
On 1st April, 2015 the Company has made final call @ Rs 2 each on 1, 35,000 equity shares. The call money was received by 20th April, 2015. Thereafter the company decided to capitalise its reserves by way of bonus at the rate of one share for every four shares held. Securities premium of Rs 37,500 includes a premium of Rs 7,500 for shares issued to vendors pursuant to a scheme of amalgamation. Capital reserves include Rs 60,000, being profit on sale of plant and machinery.
Required:
Show necessary journal entries in the books of the company.
Solution: 4
Illustration: 5
The following is the balance sheet of Reliance Limited as at 31.12.2018:
|
Particulars |
Rs |
|
Equity and
Liabilities: |
|
|
Issued and paid up capital: |
|
|
2,25,000 equity shares of Rs 10 each fully called up |
22,50,000 |
|
Less: Calls in arrear (on 25,000 shares @ Rs 2 each) |
(50,000) |
|
1,00,000 equity shares of Rs 10 each, Rs 4 paid up |
4,00,000 |
|
Profit and Loss Account |
12,50,000 |
|
Dividend Equalisation Reserve |
1,00,000 |
|
General Reserve |
1,50,000 |
|
Development Rebate Reserve |
2,50,000 |
|
Capital Reserve |
1,50,000 |
|
Securities Premium |
2,50,000 |
|
Capital Redemption Reserve |
4,00,000 |
|
Current Liability |
10,00,000 |
|
Total |
61,50,000 |
|
|
|
|
Assets: |
|
|
Non-Current Assets: |
|
|
Fixed Assets |
30,00,000 |
|
Current Assets: |
|
|
Cash at Bank |
21,50,000 |
|
Other Current Assets |
10,00,000 |
|
Total |
61,50,000 |
The board of directors of the company took the following decisions:
a.
To
forfeit the shares on which final call of Rs 2 each is due.
b.
To
issue fully paid bonus shares @ 1 fully paid up share for every 2 fully paid
shares held.
c.
To
pay bonus to the partly paid shares at an equivalent rate as in (b) above
without collecting any amount from the related shareholders.
d.
To
reissue the forfeited shares @ Rs 12 each fully fed up.
e.
To
pay dividend equivalent to 10% on share capital including bonus shares.
f.
To
issue right shares in the ratio of 1 fully paid up share for every four
existing fully paid up shares held after bonus issue at Rs 15 per share.
g.
To
use minimum balance of profit and loss account.
Note:
1.
All
Capital Reserve are realised in cash.
2.
One
fifth of the development rebate reserve is free.
Pass necessary journal entries in the books of the company including
cash transaction after the above decisions are implemented.
Solution: 5
Illustration: 6
Modern Group Limited was registered on 1st January, 2017 with
an authorised capital of Rs 3, 00,000 divided into 30,000 equity shares of Rs
10 each. During the period of next 12 months up to 31st December,
2017 following events occurred which related to the share capital of the
company:
1.
On
1st January, 2017 the company offered for subscription of 10,000
equity shares at a price of Rs 19 each, to be paid as follows:
|
At the date of issue including premium |
Rs 10 |
|
On allotment |
Rs 4 |
|
On first and final call |
Rs 5 |
2.
On
30th June, 2017 the company made right issue of equity shares on 1
for every 2 basis at Rs 22.50 per share, payable in full on 10th
July, 2017. Only 80% of the issue was subscribed for by the shareholders with a
payment being made on the due date.
3.
On
30th November, 2017 Company decided to make a bonus issue of shares
at par by utilising the entire balance of securities premium account.
Pass necessary journal entries for the above events in the books of the
company for the year ended 31st December, 2017.
Nikhilesh, a shareholder, had initially subscribed for 140 shares and
subsequently had taken up 80% of the right issue. He also received the bonus
shares to which he was entitled. Calculate the ultimate number of shares owned
by him and the total price paid by him for those shares.
Solution: 6
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