Accounting for Right and Bonus Issue

In order to raise the company’s subscribed share capital, additional capital shares are issued by way of the Rights Issue. However, instead of issuing the shares to the public at large, the Company prefers to issue shares to its already existing shareholders in proportion to their existing holding. Further, issuing shares by way of the right issue is an exceptionally used scheme to increase the company’s share capital.

Next is the concept of Bonus Shares. These are those shares which are given to the shareholders as some additional shares, on the basis of the number of shares that shareholders hold in the Company. These shares are issued to the existing shareholders that too, without receiving any consideration from them. Further, the Bonus Shares results in increasing the marketability of the Company. The actual purpose behind the issuance of Bonus shares is to bring the company’s nominal capital in line with the assets.

In this article, we will be discussing in detail about the right and bonus shares along with the accounting treatment required for both.

Concept of Right Issue

In layman terms, the rights issue is basically a formal invitation to the already existing shareholders to buy additional new shares in the company. Further, it is significant to note that the new shares that are offered to the existing shareholders are offered at the discounted rates than the market price. By issuing the right shares, companies allow the shareholders to increase their market exposure.

Further, the companies that offer to raise their capital by issuing the right shares give a part of dividends to its existing members with respect to their existing shareholdings. The actual aim behind it is to make sure that an equitable distribution of shares wherein the part of voting rights does not get affected by the issuance of new shares.

Concept of Bonus Issue

Bonus shares are offered free of cost to the pre-existing shareholders, but this happens in case the company collects benefits on earning. Further, bonus shares are issued to substitute the dividend, which has to be provided to the shareholders, thus giving them free shares.

Earlier under the Companies Act, 1956, there were no specific provisions regulating the concept of Bonus Shares. However, certain regulations were issued by the Controller of the Capital Issues, but after the enforcement of SEBI as a regulator, the same were also removed. Further, section 63 of the Companies Act, 2013, while reading with Rule 14 of the (Companies Share Capital and Debenture) Rules, 2014, talks about the Issue of Bonus Shares to the shareholders.  

Governing Section for Right Shares

Section 62 of the Companies Act, 2013, is the binding and governing section for the concept of Right Shares. Further, it is significant to note that provisions mentioned under section 62 of the Companies Act, 2013 are requisite for all the public limited companies, private limited companies, and unlisted companies.

Governing Section for Bonus Shares

Section 63 of the Companies Act, 2013 is the binding and governing section for the concept of Bonus Shares.

Provisions relating to Right Issue under the Companies Act, 2013

As per section 62 of the Companies Act, 2013^[1], if at any time, a company having a share capital wants to raise its subscribed capital by the issue of further shares. Such shares shall be provided to either of the following listed –

1. Existing Shareholders – Existing shareholders in proportion to the paid-up capital on those shares by sending a letter of offer. Such right is subject to the following conditions:
   • The offer shall be made by notice specifying the number of shares offered, time for accepting an offer, which may be a minimum of 15 days and a maximum of 30 days.
   • If the offer is not accepted within the period specified, then it shall be deemed to have been declined.
   • The above offer shall include a right to renounce the shares offered to him or any of them in favour of any other person, and this fact should be specifically mentioned in the notice.
   • After the expiry of the time specified in the notice or on receipt of earlier intimation from the person that he declines to accept the shares offered, the board of directors may dispose of them in such a manner that is advantageous to the shareholders and the company.
2. Employees – To employees under a scheme of employee stock option by passing a special resolution and complying with prescribed conditions.
3. Other persons –To other persons by passing a special resolution either for cash or for consideration other than cash. The price of such shares has to bet determined by the valuation report of a registered valuer subject to prescribed conditions.

Provisions relating to Bonus Issue under the Companies Act, 2013

Bonus shares are shares issued by a company free of cost to its existing shareholders on a pro-rata basis out of free reserves. Section 63 of the Companies Act, 2013 makes the following provisions relating to bonus issue:

• A Company may issue fully paid-up bonus shares to its members out of –
  1. Free Reserves
  2. Securities Premium
  3. Capital Redemption Reserve

However, revaluation reserve created by the revaluation of assets cannot be used for the bonus issue.

• A company shall comply with following additional conditions for the bonus shares
  1. Bonus issue is authorized by the company’s article of association
  2. A Bonus issue is made on the recommendation of the board and authorization from the general meeting of the company.
  3. Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.
  4. Company has not defaulted in payment of statutory dues of the employees like PF contribution, gratuity and bonus
  5. Bonus issue can be made only on fully paid-up shares
  6. Company also has to comply with other prescribed conditions
  7. The bonus shares shall not be issued in lieu of dividend
  8. The Issue of Bonus shares must not be done within a period of 12 months of the Public Issue.
  9. The Company must implement the proposal of Bonus Shares within a period of 6 months starting from the date of approval of the aid proposal in the Board Meeting.
  10. A company is not eligible to withdraw the Bonus Shares offer if once made.

Capitalisation of Profits and Reserves

Sometimes companies have large undistributed profits which they want to distribute among their existing shareholders. Instead of distributing these profits as dividends, they issue fully paid-up shares to them free of cost in proportion to their existing shareholdings. These shares are called Bonus Shares. As a result of this issue, the company’s issued capital increases, whereas the assets of the company remain intact.

How is the Value of Right calculated?

The value of the right is calculated with reference to the market value of the shares, and the following steps may be taken –

1. The market value of the shares held by a shareholder has to be ascertained
2. The price of the new share, which is required to be paid to the company, has to be added with the market value of the shares held to ascertain the total price of all the shares.
3. The average price of one share has to be ascertained by dividing the total price of all the shares by the number of shares.
4. The value of the right will be the difference between the market value and the average price of the share.
5. The formula for calculating Value of Right

Value of Right = Market Value – Average Price

6. An Alternative Formula is

Right shares/ total shares after right issue X (Cum right price – New Issue Price)

Difference between Bonus Shares and Right Shares

Accounting Entries for Bonus Issue

• Securities Premium A/c    Dr

Capital Redemption Reserve A/c   Dr

Other Reserves A/c (only distributable as divided)  Dr

To Bonus to Shareholder A/c

(Being an issue of ____ bonus shares in the ratio of ____ as per the shareholder resolution No ____ dated ____)

• Bonus to Shareholders A/c Dr

  To Equity Share Capital A/c

(Being Balance of Bonus to shareholders transferred to the equity share capital account)

Accounting Entries for Right Issue

1. Bank A/c  Dr

To Share Capital A/c                                                    

 To Securities Premium A/c

(Being_____ equity shares of Rs___ each issued at Rs___ per share as per shareholders resolution No _______ dated _____)

Conclusion

The Companies Act, 2013, prescribes the provisions relating to the Issue of Bonus Shares to the already existing shareholders. Further, for the issue, the Articles of Association of the said company should authorize for the same. Furthermore, it is significant to note that the concerned company cannot withdraw its decision if in case the Issue of Bonus Shares once proposed.

The rights issue is basically an invitation to the already existing shareholders to buy additional new shares in the company, that too, at the discounted rates than the market price. Section 62 of the Companies Act, 2013, is the binding and governing section for the concept of Right Shares, and it is applicable to all the public limited companies private limited companies, and unlisted companies.