MBA (BA)

Chapter No 3

Bonus Shares- Introduction

• All successful companies want to increase their capital base.

• In order to do so, they retain back larger part of the profit and distribute little portion as cash dividend to the shareholders.

• Later on, companies utilise this retained earnings for issuing bonus shares.

• Bonus shares are those shares which are issued to the existing shareholders for free on prorata basis.

• This enhances the capital base of the company.• Issue of bonus shares do not effect the Balance Sheet of

the company.

Advantages

• Conservation of Cash

• Widening the Share Market

• Economical Issue of Securities

• Tax-Saving

• Marketability of Shares

• Higher Future Profits of the Company

• Increased Future Dividend

Limitations

• Issue of bonus shares declines the rate of dividend in future. 

• It encourages speculative dealings in shares of the companies.

• Approval of SEBI is necessary before issue of bonus shares. Hence, it is a lengthy process. It may delay in the issue of shares.

Guidelines for issue of bonus shares

• Bonus issues are not permitted in lieu of dividend.

• There must be an internal of at least 40 months between two successive announcement of bonus issues by a company.

• Not more than two bonus issues are allowed over a period of five years.

• Bonus issues are not permitted unless partly paid up shares, if any, are made fully paid up.

• At any one time, the total amount permitted to be capitalized for issue of bonus shares out of free reserves shall not exceed the paid up equity capital of the company.

• A resolution should be passed approving the proposed capitalization of profits before an application is made to the Controller of Capital Issues.

• The Article of Association permit the issue of Bonus Shares.

• Bonus issues are permitted only out of free reserves built out of genuine profits or share premium collected in cash only.

Right Shares - Introduction

• A rights issue is an option that a company opts for to raise capital under a Primary market offering or seasoned equity offering of shares to raise money.

• The rights issue is a special form of shelf offering or shelf registration.

• With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time

• Companies usually opt for a rights issue either when having problems raising capital through traditional means or to avoid interest charges on loans.[3]

Advantages

• Right issue gives the existing shareholders an opportunity to maintain their pro-rata share in the earning and surplus of the company and the voting power as before.

• The goodwill of the company increases in the eyes of existing shareholders.

• The cost of issue of such shares will also be lower.

• The financial management is relived of the botheration of selling the shares.

• If right shares are offered by the shareholders enthusiastically, it proves that financial position of the company is sufficiently good, and the company can obtain more loans at lower rate of interest.

Guidelines for Right Shares

• First, the offer must be made by giving a notice to the existing shareholders, mentioning therein the number of shares offered and the time within which the offer must be accepted.

• Such period shall not be less than 15 days from the date of offer, however it may be more than 15 days keeping in mind that shareholders must have sufficient time to make up their mind judiciously.

• Shareholders shall inform the company within stipulated period, of other acceptance of right or the name of the nominee to whom he wants to renounce his right.

Cntd……

• An existing shareholder may also apply for the additional shares but a shareholder who has renounced his right in favour of any person is not entitled to apply for additional shares.

• If the right shares are not fully taken up, the balance left over shall be distributed equally among the applicants for additional shares with reference to the shares held by them in the company. Subject to stock exchange on which the company's shares are listed.

• Any balance left after making allotment of additional shares, the company may deal with in any manner it likes.

Dividend

• Under the tax laws, if a company distributes its accumulated profits through the release of any of its assets to shareholders, the distribution will be regarded as a dividend.

• The definition also includes the distribution of debentures or deposits by a company, irrespective of whether the debentures or deposits are interest-bearing or not.

Cash dividends

• Cash dividends (most common) are those paid out in currency, usually via electronic funds transfer or a printed paper cheque

• This is the most common method of sharing corporate profits with the shareholders of the company.

• or each share owned, a declared amount of money is distributed.

Stock or scrip dividends

• Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing corporation, or another corporation (such as its subsidiary corporation).

• They are usually issued in proportion to shares owned

Property dividends

• Property dividends or dividends in specie (Latin for "in kind") are those paid out in the form of assets from the issuing corporation or another corporation, such as a subsidiary corporation.

• They are relatively rare and most frequently are securities of other companies owned by the issuer, however they can take other forms, such as products and services.

Dividend Dates

• Dividends must be "declared" (approved) by a company’s Board of Directors each time they are paid. For public companies, there are four important dates to remember regarding dividends.

• Declaration date is the day the Board of Directors announces its intention to pay a dividend.

• In-dividend date is the last day, which is one trading day before the ex-dividend date, where the stock is said to be cum dividend

• Ex-dividend date is the day on which all shares bought and sold no longer come attached with the right to be paid the most recently declared dividend.

• Record date Shareholders registered in the stockholders of record on or before the date of record will receive the dividend. Shareholders who are not registered as of this date will not receive the dividend.

• Payment date is the day when the dividend checks will actually be mailed to the shareholders of a company or credited to brokerage accounts.

Face Value and Market value

• All companies issue shares with a fixed denomination called the face value (or par value) of the share. This face value be indicated on the share certificate. Generally Indian shares has a face value of Rs. 10/-

• The current quoted price at which investors buy or sell a share of common stock or a bond at a given time at stock exchange

Face Value and Market value

Company Face Value Rs Market Value Rs

Tata Motors 10 1172

Infosys 05 3055

Reliance Ind 10 993.10

ICICI Bank 10 1006.85

ONGC 05 281.50

Preference share v/s Equity Shares

Point of Distinction

Preference Shares

Equity Shares

Right of receiving Div

Enjoys first preference to receive Div

Rank next to preference shares in receiving Div

Right of receiving back capital

They enjoy first right of priority in receiving back capital

Rank next to preference shares in the return of capital

Point of Distinction

Preference shares

Equity Shares

Rate of Div Dividend rate is fixed by Articles of Association

Div is rate id not fixed. It depends upon the EPS and overall business policy

Voting Rights Shares are not entitled to any voting rights

Equity shareholders enjoy normal voting rights

Point of Distinction

Preference shares

Equity Shares

Redeemably during the life time of the company

Preference shares are redeemable at the end of the period for which they are issued

Equity shares are always irredeemable except buy back