Unit-5 Issue of Right-Business Accounting | BBA First Year

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Right Issue

• A rights issue is a rights offering to existing shareholders of a company that gives them the opportunity to purchase additional shares at a discounted price directly from the company rather than buying them in the secondary market. The number of additional shares that can be purchased depends on the existing holdings of the share owners.

Features of Rights Issue

• Companies take up rights issues when they need cash for various purposes. This process allows the company to raise funds without underwriting fees.
• A rights issue gives preferential treatment to existing shareholders, where they are given the right (not the obligation) to buy shares at a lower price on or before a specified date.
• Existing shareholders also have the right to trade with other interested market participants until the date new shares are purchased. Rights are traded in the same way as ordinary equity shares.
• The number of additional shares that shareholders can purchase is usually in proportion to their existing shareholding.
• Existing shareholders may also choose to ignore rights; However, if they do not purchase additional shares, their existing shareholding will be diluted once the additional shares are issued. Due to rights issue
• When a company is planning to expand its operations, it may require a large amount of capital. To avoid fixed payment of interest they may prefer to opt for equity rather than opting for loan. Rights issues can be a fast way to raise equity capital.
• A project where debt/debt funds may not be available/suitable or expensive, usually the company raises capital through a rights issue.
• Companies that want to improve their debt-equity ratio or buy a new company can opt for funding through the same route.
• Sometimes troubled companies may issue shares to pay off debt to improve their financial health.
  

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• https://pencilchampions.com/relevance-of-economics-in-business-managementunit-1-poe-bba-1st-semester/
  

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Redemption of Preference Shares

• A company cannot return its share capital to its shareholders during its lifetime without the permission of the Court (Section 100). However, a company limited by shares may, if authorized by its articles, So one may issue a special category called Redeemable Preference Share, which can be redeemed during its life period as per the provisions of the section. Section 80 of the Companies Act, 1956.
• Redeemable preference shares are those, the amount of which can be paid back to the holders of such shares. That is, the capital raised through the issue of redeemable preference shares can be paid by the company for such shares. Payment back of capital is called redemption.
• Redemption of redeemable preference shares does not reduce the authorized capital of the company. From the creditors’ point of view the capital remains intact as the redeemed share capital is replaced by the nominal value of new shares issued for the purpose of redemption or for practical purposes is equal to that paid by the Capital Redemption Reserve Account of the company. Capital up.
  

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  External link-https://theintactone.com/2019/09/01/ccsubba-104-book-keeping-basic-accounting/

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Companies (Amendment) Act 1988 and 1996

• On the basis of Section 5A. 80 of the Companies (Amendment) Act 1996, No. A company limited by shares can issue non-redeemed preference shares. Further, by the insertion of section 80A in the Amendment Act of 1988, companies which had issued non-redeemable preference shares before the commencement of the Amendment Act, 1988 were required to redeem such shares within a period of 5 years from 15th June 1988, regardless of the terms of the issue.
• In case of redeemable preference shares released before June 15, 1988, redemption was to be effective on the appointed date as per terms of issue, or within a period of 10 years From the date of commencement of Amendment Act, 1988.
• Where a company was not in a position to redeem its preference shares or pay the dividend, if any, payable thereon within 10 years, it shall be issued fresh redeemable preference shares equal to the amount payable on the unredeemed preference shares. Was allowed to do so. National Company Law Tribunal. At such issue, the unredeemed preference shares are deemed to have been redeemed.
• 80 of the Companies Act authorizes fresh issue of redeemable preference shares only. No company is allowed to convert existing preference shares into redeemable preference shares. Further by the Amendment Act 1996, no company limited by shares can issue preference shares which are non-redeemable or redeemable after the expiry of a period of 20 years from the date of their issue. Thus, the maximum period of redemption is 20 years.

The above discussion makes the following points clear:

• “To repay” means “to pay back or return”.
• Redemption of preference shares means repayment of money paid by the holders of redeemable preference shares in lieu of the issue of such shares.
• Preference shares can be redeemed only when they have been fully paid. That is, partially paid preference shares cannot be redeemed.
• Sources of redemption come from two sources – fresh issue of shares and profits of the company.
• When redemption is out of fresh issue, the amount received on the fresh issue is used for redemption of preference shares. In this way new shares take the place of the redeemed shares.
• When redemption takes place out of profit, the required amount is transferred from the profit to a special account called “Capital Redemption Reserve Account”. The preference shares are then redeemed. The Capital Redemption Reserve Account replaces the shares redeemed.

Source of Salvation

• One of the conditions for redemption of preference shares provides that where redemption is to be made at a premium, it is to be provided from the profits of the company or from the Securities Premium Account of the company.
• This condition apparently allows a company to redeem its preference shares at a premium. Accordingly, one of the sources of redemption on premium is the Securities Premium Account or, in the absence of a Securities Premium Account, the retained earnings of the company
• Following are some examples of profits that are available for dividends and which can be used for the purpose of creating a Capital Redemption Reserve Account:

• Latest issue earnings Fresh issue of shares can be made only by equity shares or preference shares. This is to do Remember that the income of Borrowing (for example by issuing debentures or loan) or income from certain sales Assets/investments cannot be accessed Objective. This also has to be remembered there will be no reduction in preference shares. Is considered as lacking its authorized Share capital.
• The term “proceeds” means the amount received on new issue of shares excluding the amount of security premium. Similarly, when the new issue is at par or at a discount, the net amount received from the issue should be treated as “proceeds”.

Redemption of Debentures

• Debentures are debt instruments. So when their tenure expires, the debenture holders are paid their principal amount. This process of repaying the company’s debt is known as redemption of debentures. Let us learn more about the different methods of redemption of debentures and their accounting treatments.
• Redemption of debentures means Repayment of these debentures by Company to debenture holders. This much The company will discharge its liabilities and Remove it from the balance sheet. this is a Major transactions for the company since The amount of money involved is considerable important
• There are a few ways in which this redemption of shares can happen. The accounting treatment of all these methods is also different.
• Let us take a look at the different methods of redemption of debentures.

1. Lump sum method

• As the name suggests this method is a lump sum payment method. Here the company will pay the entire amount to the debenture holders in one lump sum payment. The amount and date of payment will be as per the terms of issue.
• Since the company knows the repayment date in advance, they can plan their finances accordingly. Therefore they make provision for payment to debenture holders. Therefore the company will have to make provision for such debentures as per the provisions of the Companies Act and SEBI guidelines. And so the company sets up a special account called a reserve. As debenture redemption
• This debenture redemption reserve is a capital reserve account. It is funded from divisible profits of each year, i.e. a portion of the profits is set aside for this purpose. This account can be used only for redemption of debentures and not for any other purpose.

2. Installment method

• This is also known as the multiple graphing method. Here the company will start redeeming the debentures in lots or installments from a particular year as per the terms of the issue.

3. Conversion Method

• A company may choose not to make payment to debenture holders at the time of redemption. Instead, it may convert the debentures into debentures or even a new category of equity shares. Such debentures are known as convertible debentures. Such new debentures or shares may be issued at par, at a premium or even at a discount.