Right shares and bonus

shares
 a. Call a Board meeting by issue notice of meeting.
 b. Approve right issue including “letter of offer”,
 c. Send offer letter to all existing members as on the date of offer.(Through registered
post or speed post or through electronic mode to all the existing share -holders
at least three days before the opening of the issue.)
 d. Receive acceptance/rejection of rights from members to whom offer has been sent
 e. Call a Board meeting by issue of notice.
 f. Approve allotment by passing of Board Resolution.
 g. Issue of share certificates.
 h. Authorize two directors and one more person for signature on Share Certificates.
 i. Attach list of allottees mentioning Name, Address, occupation if any and number of
securities allotted to each of the allottees and the list shall be certified by the
signatory.
 j. Authorize a director to file E-form with SEBI within 30 days of passing of Resolution.
 k. Authorize a director to file E-form for issue of share certificate within 30 days of
passing of Resolution.
 l. File E-form for issue of share.
 m. Issue share certificate.
 n. Make Allotment within 60 days of receiving of Application Money; otherwise it
will treat as deposits as per deposits rules.
 Subscription of capital

 Offer to the existing shareholders

 Proportionate issue
 Offer by at least 15 days notice
 Right to refuse
 Exceptions as per sebi section 81

 Rights issues should not be kept open for more than 60

days.

 These provisions do not apply to a private company ;

1. To the increase of the subscribed capital of a public

company caused by debentures issued or loans raised
by the company.

2. To increase Authorized Capital of company

 Retention of control in the hands of existing
shareholders
 Shares are offered at discounted price & more certainty
of getting shares
 Saves money, hence finance cost reduces- exp of public
issue is saved
 Directors cannot be biased- to friends, relatives at low
price
 Equal distribution of shares & voting rights.
 Existing shareholder may not be interested

 Value of each shares may get diluted – EPS reduces

 For well established company, it may create

negative impression.
A company gives cash bonus to its shareholders only
when it has larger reserves and sufficient cash to
pay bonus. On the other hand, capital bonus is paid
when the company wants to share the accumulated
reserves with shareholders but it is not in a position
to pay cash bonus because it adversely affects the
working capital of the company.
 Capitalization of profits may be done in two
ways:-

 By making partly paid up share fully paid up.

 By issuing fully paid bonus shares to existing

shareholders free of cost
 Accumulated large reserves
 Company not in a position to give cash bonus
 When value of fixed asset exceeds the amount of
capital
 To tackle the problem of shareholders demanding
the same rate in future
 Big difference between market value and paid up
value of shares – G/W increases & so MP increases
 Section 205(3), 78(2) and 80(5) of companies act,
1956 and regulation 96 and 97 of table A make
provisions of bonus share.
 Section 205(3) provides that a company may
capitalize its profits or reserves for the purpose of
issuing fully paid bonus shares or pay up any amount
for the time being unpaid.
 Section 78(2) provides that the securities premium
may be applied in paying up unissued shares of the
company as fully paid bonus shares to its members.
 Section 80(5) provides that the CRR may be applied
by the company in paying up unissued shares to be
issued as fully paid bonus shares to its members.
 made out of free reserves .
 Reserves created by revaluation of Fixed Assets are
not capitalized.
 The declaration of bonus issue, in lieu of dividend, is
not made.
 The bonus issue is not made unless the partly paid-
up shares, if any existing, are made fully paid-up.
 A company must have approval within the six
months.
 the company shall pass a resolution for making
provisions in the Articles of Association for
capitalization.

resolution shall be passed by the company for

increasing the authorized capital

 the rate of dividend to be declared in the year

immediately after the bonus issue should be indicated
in the AGM

 No bonus issue will be made which will dilute the

value of rights of the holders of debentures,
convertible fully or partly.
Free Reserves that can be used for
Issue of Bonus shares :
 Surplus in Profit and Loss account.
 General Reserve
 Dividend equalization reserve.
 Capital reserve arising from profit on sale of
fixed assets received in cash.
 Balance in debenture redemption reserve
after redemption of debentures.
 Capital Redemption Reserve A/c created at
the time of redemption of redeemable
preference shares out of the profits.
 Securities Premium collected in cash only .
Advantages

 when the company cannot pay dividend in

cash due to shortage of liquid funds
 company does not prefer to pay dividend
in cash for the purpose of either its
extension or its working capital or any
other specific purposes.
 company is bound to reduce its reserve for
the interest of its own.
disAdvantages

 If the rate of dividend fluctuates,

i.e., cannot be maintained, the
market value of shares may go
down.
 If the rate of profit is not
increased, the rate of dividend
may be decreased.
 It encourages speculation which is
not desirable.
 Bonus shares Right shares

 Issued to existing
 Existing shareholders
shareholders free of will have to pay.
cost.  can be fully as well as
 Always fully paid up. partly paid up.
 Regulated by sec 81
 Acc. to the provisions
of companies act.
of AOA and SEBI
guidelines  Subject to minimum
subscription
 No minimum
subscription.  No separate price for
 Separate price for transfer
transfer.