Unit- Issue of Share- Business Accounting | BBA First Year
Unit- Issue of Share- Business Accounting | BBA First Year

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

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Unit- Issue of Share- Business Accounting | BBA First Year
Business Accounting

Share Issue

Types of share issue

  • There are several ways in which shares in a company can be issued, as discussed below:

  1. Public Issue:

  • Public Issue or Public offering refers to the issuance of shares or convertible securities in the primary market by the promoters of the company to attract new investors to subscribe.

Initial Public Offering:

  •  It is an offer in which an unlisted or privately held company makes a new issue of shares or convertible securities, or an already listed company makes an issue of existing shares convertible or securities for the first time to the public at large.
  • Thus the unlisted or budding company lists its shares in a recognized stock exchange and goes public, raising funds to run the business. On the other hand, established institutions facilitate IPOs that require owners to sell some or all of their ownership to the public.

Further public offering:

  • If an already listed company, which has gone through an IPO, offers additional shares for sale to the public on new or better terms, so as to expand their equity base or to pay off debts, this is known as follow-. On public offer or further public offer (FPO)
  1. Rights Issue:

  • In a rights issue, shares or convertible securities are offered to the existing shareholders at a discounted rate on a fixed date decided by the company. The main objective of issuing rights shares is to raise additional funds by offering shares to existing equity shareholders in proportion to their holding, rather than creating a fresh issue.
  1. Composite issue:

  1. Bonus Points:

  • As the name suggests, these are free additional shares distributed to existing shareholders in proportion to the fully paid equity shares held by them on a particular date. These shares are issued from the free reserve securities premium account of the company. Or
  1. Private Placement:

  • If a company raises capital by offering shares to a selected group of investors who may be mutual funds, banks, insurance companies, pension funds, etc., it is called private placement.

Preferential issue:

  • Preferential allotment is one in which a publicly listed enterprise allots shares to a selected group of investors such as individuals, venture capitalists, companies on a preferential basis.
  • Qualified Institutional Placement (QIP): If listed: The organization offers shares or securities as equity non-convertible to a qualified institutional buyer for sale to raise capital. Eligible institutional buyers here include mutual funds, venture capital funds, public financial institutions, insurance funds, scheduled commercial banks, pension funds etc.

 Issuance at Premium

  • Now we come to the issue of debentures at a premium, i.e. when more money is borrowed than the face value.

Issue of Debentures for Consideration other than Cash

  • The company may have purchased assets from some sellers or acquired another business. The company can then issue debentures to such sellers instead of paying in cash. For debentures, such issue may be at par, at a discount or at a premium.

Issuance of Debentures as Collateral Security

  • Collateral security is like a parallel security that is provided along with the actual security against the loan taken. The debentures issued as such collateral liability are a contingent liability of the company, i.e. the liability may or may not arise. This liability will arise only if the company defaults on such debt.

Issue of Bonus Shares

  • It is quite natural that every prudent company would want to create reserves from its profits for future expansion as well as to declare dividends in the short term.

A company that has built up sufficient reserves decides to capitalize a portion of these reserves:

  • By issuing fully paid bonus shares to the existing shareholders and/or
  • By converting partially paid-up shares into fully paid-up shares without paying anything to the shareholders.

The following circumstances warrant the issue of bonus shares:

Accumulated Large Reserves:

  • When a company has accumulated large reserves (be it capital or revenue) and it wants to cash these reserves by issuing bonus shares.

Not in a position to pay cash bonus:

  • When the company is not in a position to pay cash bonus as it adversely affects its working capital.

Value of fixed assets far exceeds the quantity of capital:

  • When the value of fixed assets exceeds the amount of capital.

High rate of dividend is not justified:

  • When the rate of dividend is not high enough to be justified for distribution the shareholders will demand the same rate of dividend due to the accumulated reserves in the future, which the directors may not be able to give. 

Large difference between market price and paid price:

  • The company issuing bonus shares is in a better position in the market. The price of equity shares has increased sharply after the announcement of the bonus issue.

Objectives of Bonus Points:

Cheap:

  • Issuance of bonus shares is a cheap way of raising capital by which the cash resources of the company are preserved.

More marketable:

  • Issuance of bonus shares reduces the market value of the shares, making them more marketable.

Indicator of good prospects:

  • Issuance of bonus shares is a signal to investors that the company has good prospects.

Bonus release process:

  • If necessary the authorized capital should be increased by passing an ordinary resolution.

Types of Bonus Points:

  • Fully Paid Bonus Shares:
  • Partly Paid Bonus Shares:

Source of Bonus Points:

Fully paid-up bonus shares can be issued from the following sources:

  • Capital redemption reserve
  • Security Premium** (collected in cash)
  • Capital Reserve* (Received in cash)
  • Profit and Loss Account
  • General reserve
  • Investment Allowance Reserve
  • Sinking fund for redemption of debentures (after redemption)
  • Development rebate reserved.

Part-paid bonus shares may be issued from the following sources:

  1. Capital Reserve* (Received in cash)
  2. Profit and Loss Account
  3. General reserve
  4. Investment Allowance Reserve
  5. Development Rebate Reserve
  6. Sinking fund for redemption of debentures (after redemption)

Note:

  • Security Premium Account and Capital Redemption Reserve Account cannot be used for issue of partially paid bonus shares.

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