The company issues equity shares in the market. The equity shareholders are the real owner of the company.
A company can raise funds by offering shares to its existing equity shareholders as follows.
(i) Right Issue: A right issue is an invitation to existing shareholders to purchase additional new shares in the company. A right issue is a way by which a listed company can raise additional capital. Instead of going for the public issue of shares, the company gives its existing shareholders, the right to subscribe to newly issued shares in proportion to their existing equity shareholding.
Whenever a company makes the further issue of shares the existing equity shareholders have preemptive rights means the first option to buy shares.
Company making rights issue has to fulfil the following provision:
- Rights shares are sold to the existing shareholders at a price that is lesser than its market price.
- A company has to send a ‘Letter of offer’ to the existing shareholders at the time of issuing Rights Shares.
- The letter of offer shall mention
- The number of shares offered.
- The period of offer i.e., offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of the offer.
- The letter of offer can be sent by registered post, speed post, courier or through electronic mode.
- If a shareholder does not respond to the Rights Issue offer within a given time, it is implied that he is not interested in the offer and company can offer the unsold shares to new Investors.
(ii) Bonus Issue/Bonus Shares: Bonus Shares are shares distributed by a company to its current shareholders as fully paid shares free of charge. The Bonus shares are given to the existing equity shareholders according to their existing proportion of equity shareholdings.
Like for example, a company declaring one for two bonus share proportion means that an existing shareholder would get one bonus share of the company for every two shares held. Financially sound companies issue Bonus shares out of their accumulated distributable profits or reserves. Hence as the profits or reserves are capitalized, it is called “Capitalisation of Profits or Reserves.”
Following are the provisions related to Bonus Issue:
- A company can issue Bonus shares only out of
- Free reserves or
- Securities Premium Account
- Capital Redemption Reserve Account
- A company cannot issue bonus shares only out of Reserves Credited by the Revaluation of Assets.
- It also cannot issue Bonus Shares instead of paying dividends.
- Once the announcement for Bonus shares is made by the Board of Directors, it cannot be then withdrawn.
- Bonus shares are fully paid up shares.
- Shareholders cannot renounce i.e, give away their Bonus Shares to another person.
- There is no minimum subscription to be collected.
