Bonus Shares and Rights Share

Profit-making companies often seek ways to utilize their accumulated profits effectively. One approach is to convert these profits into share capital, a process commonly known as the issue of bonus shares or capitalization of profits. By issuing bonus shares, companies can achieve this conversion, benefiting both the company and its shareholders

Bonus Shares: Converting Partly Paid Shares to Fully Paid

One type of bonus share issuance involves converting partly paid shares into fully paid shares without requiring shareholders to make additional payments. This approach enables companies to utilize their accumulated profits to enhance the shareholders’ equity holdings. By declaring bonus shares, the company essentially converts a portion of its profits into share capital, distributing these additional shares among its existing shareholders. Consequently, the shareholders’ ownership in the company increases without any immediate financial burden.

Fully Paid Equity Shares as Bonus Shares

Another form of bonus share issuance involves offering fully paid equity shares as bonus shares to existing equity shareholders. In this case, the company issues new shares, which are already fully paid for, and distributes them among its shareholders as a bonus. By doing so, the company rewards its shareholders with additional ownership in proportion to their existing shareholding. This type of bonus share issuance is an effective way to increase the shareholders’ stake in the company without requiring them to invest additional capital.

Rights Shares: Additional Shares for Existing Equity Shareholders

Apart from bonus shares, companies can also issue additional shares through a mechanism known as rights shares. To do this, the company must pass an ordinary resolution at its General Meeting, granting authorization for the issuance of additional shares. However, before offering these additional shares to external parties, the company must first provide its existing equity shareholders with the opportunity to purchase these shares. This offer is made in proportion to the shareholders’ existing shareholdings. Such additional shares, offered exclusively to existing equity shareholders, are known as “Rights Shares.”

Requirements and Timing for Rights Shares

There are certain requirements and timing considerations associated with rights shares issuance. Firstly, the number of rights shares offered should fall within the limits of the company’s authorized capital. If the authorized capital is insufficient, it must be increased accordingly before the issuance can take place. Secondly, the issuance of rights shares should occur after two years from the company’s formation or after one year from the first allotment of shares. These timelines ensure that the company has an established track record before proceeding with the rights shares issuance.