Corporate Law 52 ed 21 BONUS SHARE & RIGHT SHARE BONUS SHARES Where the company does not distribute its profits and reserves during the particular year, it may issue fully paid bonus shares which are given to members instead of dividend. The shares so issued are called Bonus Shares. Bonus shares are additional shares given to the current shareholders without any additional cost, ‘based upon the number of shares that a sharcholder owns, These arc company's accumulated carnings which are not given out in the form of dividends, but are converted into free shares. Why Companies Issued Bonus Shares 1. The company has enough reserves, which it may not require in future. There exist a big gap between the paid-up capital and the capital actually employed in the business duc to huge reserves. 3. If there are excessive divisible profits with the company, the company distributes a high rate of dividend, Issue of bonus shares enables companies to reduce the dividend rate and to regularize it on yearly basis Conditions for the issue of bonus share Sufficient undistributed profits must be there. Articles of Association must permit the issue of bonus shares. Suitable resolution by the Board of Directors must be passed. Formal approval of the shareholders in a general meeting is necessary. The guidelines regarding the issue of bonus shares prescribed by SECP must be followed. To ensure that the bonus issue is within the limits of authorized share capital of the company To convene a meeting of the Board of Directors To issue allotment letters to the members To make necessary entries in the registrar of members 0. To prepare and issue new bonus shares certificates, 1 2 3 4 Guidelines for bonus issue 1. The bonus issue is made out of free reserves made out of the profits or share premium collected in cash only Reserves created by revaluation of fixed assets are not used to issue bonus share ‘The declaration of bonus issue, in lieu of dividend, is not made. ‘The bonus issue is not made unless the partly-paid shares are made fully paid-up. A company which announces its bonus issue after the approval of the Board of Directors must implement the proposal within a period of six months from the date of such approval. While issuing bonus shares, a company must forward to SECP a certificate that all the requirements have been complied with. awe JAMSHAID IFTIKHAR M.Phil Commerce & FinanceCorporate Law 53 SS RIGHT ISSUE In a right issue the company invites its existing shareholders or debenture-holders to subscribe the further capital. The company sends to each shareholder or debenture-holder a circular called a letter of rights, inviting him to take further shares or debentures in proportion to his existing holding. Right Letter ‘The company shall issue a ‘right letter’ to every member. This notice shall contain the following information a, Name and particulars of the member; 'b. The mumber of shares the member is entitled; ¢. The amount payable to the company against each share; and d. The last date by which the member has to accept the offer, Circular issued by Directors The ‘right letter’ shall be accompanied by a circular duly signed by the directors or other authorized officer. The circulars shall be in the form prescribed by the SECP and shall contain: a, The material information about the affairs of the company; bb, The latest statement of accounts; c. Thestatement necessity for issue of further capital; and 4d. The date by which the offer, if not accepted. ‘The offer of new shares shall be strictly in proportion to the number of existing shares held. Fractional shares shall not be offered, Cases under which a company may issue shares to persons other than its existing shareholders a. Where the members of a public company has authorized it, by passing a special resolution, to increase its capital without issue of right shares. b. The special resolution (after passing) shall be effective only if the Federal Government has allowed such issue. ¢. A company may, with the approval of the SECP, issue certain percentage of further capital under "Employees’ Stock Option Scheme"; d. A company may issue shares to financial institutions in lieu of outstanding balance of loans, etc. JAMSHAID IFTIKHAR M.Phil Commerce & FinanceCorporate Law BONUS SHARE RIGHT SHARE T_| Bonus shares are given to the shareholders out of the free reserves created from additional profits made by the company during the year. Rights shares are offered to the existing shareholders by the company for raising additional capital from the market 2 [Bonus shares are issued to the | Rights shares are offered at a discounted price sharcholders free of cost. compared to the market price. 3 | Bonus shares are always fully paid up. | Rights shares are either partly paid or fully paid- up depending on the proportion of the paid-up value of equity shares, 4 | It lowers the share price according to the | Share price affected if the shareholders sell the proportion. shares to the open market. 5 | Does not require a minimum subscription. ‘Requires minimum subscription. The aim is to bring the share price down Also, issued as alternative dividends payments to stakeholders The aim is to raise additional capital for the company, JAMSHAID IFTIKHAR M.Phil Commerce & Finance