Question

Answer the following question.

Explain briefly the different types of shares offered by a company to its existing equity shareholders.

Answer 1

The different types of shares offered by a company to its existing Equity shareholders are as follows: 

(1) Rights issue:

1. The Company issue shares to its existing equity shareholders in the proportion of shares holding by them. Such shares issued are called as 'Rights Issue' of shares. Under the rights issue, such shareholders are given pre-emptive rights to apply for new shares.
2. However, if the shareholder does not opt to subscribe to such shares, then the company has the option to sell it to the general public.
3. A company can make a Rights Issue when it is making a private placement.
4. The main aim of issuing the right shares is to raise additional funds by offering shares to the existing equity shareholders.

The provisions related to Rights Issue are as follows:

1. Rights shares are sold to the existing shareholders at a price which is lesser than its market price.
2. A company has to send a 'Letter of offer' to the existing shareholders at the time of issuing Rights shares.
3. 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 right to renounce i.e. the shareholders have a right to give up their shares in favour of any other person.
4. The letter of offer can be sent by registered post, speed post, courier, or through electronic mode.
5. If The shareholder does not respond to the Rights Issue offer within a stipulated time*, it is implied* that he is not interested in the offer and the company can offer the unsold shares to new investors.
6. The company has to obtain a minimum subscription i.e. 90% of the issue.

(2) Bonus issues:

1. Bonus issues refer to the fully paid-up shares given to its existing equity shareholders without any cost, based upon the number of shares they have.
2. Such shares are given by the company as a gift to its existing equity shareholder out of its profits or reserves.
3. For this purpose, a certain proportion is decided. For instance, if a person holds 100 shares and the company declares 1:2 bonus issues, then for every 2 shares held, he gets 1 share free of cost.
4. The process of issuing the bonus shares out of the company's profits or reserves is known as 'Capitalisation of Profits'.

Provisions related to Bonus Issues are as follows:

1. A company can issue Bonus Shares only out of:
   • Free reserves or
   • Securities Premium Account* or
   • Capital Redemption Reserve Account*
2. A company cannot issue Bonus Shares only out of reserves created by Revaluation of Assets*.
3. The company also cannot issue bonus shares instead of paying dividend.
4. Once the announcement for Bonus Shares is made by the Board of Directors then it cannot be withdrawn.
5. Bonus shares are fully paid up shares. Shareholders cannot give away their bonus shares to another person.
6. There is no minimum subscription to be collected.