Bonus Issues and Rights Issues
A company may wish to increase its share capital without needing to raise additional finance by issuing new shares. For example, a profitable company might expand from modest beginnings over a number of years. Its profitability would be reflected in large balances on its reserves, while its original share capital might look like that of a much smaller business.
It is open to such a company to re classify some of its reserves as share capital. Any reserve may be re classified in this way, including a share premium account or other statutory reserve. Such a re classification increases the capital base of the company and gives creditors grater protection.
A rights issue is an issue of shares for cash. The “rights” are offered to existing shareholders, who can sell them if they wish.
Rights issues are a popular way of raising cash by issuing cash by issuing shares and they are cheap to administer. In addition, shareholders retain control of the business as their holding is not diluted.
The disadvantage of rights issues is that shareholders are not obligated to take up their rights and so the issue could fail to raise the money required. For this reason companies usually try to find a broker to “underwrite” the issue, i.e. who will buy any rights not taken up by the shareholders.
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