Corporate Law
52
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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,
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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 & FinanceCorporate Law
53
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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 & FinanceCorporate 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