2. A rights issue is an issue of rights to buy
additional securities in a company made to
the company's existing security holders.
When the rights are for equity securities, such
as shares, in a public company, it is a way to
raise capital.With the issued rights, existing
security-holders have the privilege to buy a
specified number of new securities from the
firm at a specified price within a specified
time.
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3. A rights issue is directly offered to all
shareholders of record or through broker dealers
of record and may be exercised in full or
partially. Subscription rights may either be
transferable, allowing the subscription-rights
holder to sell them privately, on the open market
or not at all.The price at which the shares are
offered is usually at a discount to the current
share price, which gives investors an incentive to
buy the new shares — if they do not, the value of
their holding is diluted.
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4. More control on existing shareholders
Because right shares are issued to existing shareholder, so there is no risk of
losing of control of existing shareholders. Existing shareholders’ share will
increase in company and they can take decision without any compromise with
the principles of company. It is very helpful to achieve the missions of
company.
2. No loss to existing shareholder
By issuing shares to existing shareholders, value of share will increase due to
stability in controlling power of company. So, there will not be any loss to
existing shareholders with right shares.
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5. 3. No cost for issuing shares to public
Company has not to give any invitation to public, so advertising cost and other
new issue cost will decrease with right shares.
4. Helpful to increase the goodwill of company
It is also way to increase the goodwill and reputation of company in industry.
5. Capital formation
Company can get capital at any time without any delay because company can
easily issue of shares to existing shareholders just sending right shares offer
notice.
6. More scientific
Distribution technique of right shares issue is more scientific. Not all shares will
get by single shareholders but it will be in the proportion of existing shares which
is in the hand of old shareholders at this time
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6.
1.The value of each share will be diluted as a result of the
increased number of shares issued.
2. It is awfully easy for investors to get tempted by the prospect of
buying discounted shares with a rights issue. But it is not always a
certainty that you are getting a bargain. But besides knowing the
ex-rights share price, you need to know the purpose of the
additional funding before accepting or rejecting a rights issue.
3. A rights issue can offer a quick fix for a troubled balance
sheet, but that doesn't necessarily mean management will address
the underlying problems that weakened the balance sheet in the
first place.
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7. Right shares must be in ratio of equity shares of
existing shareholders.
Right shares will be issued with 15 days notice.
This notice will be offer. Existing shareholders
can either accept or reject this offer.
Right shares issue must not be opened more
than 60 days under SEBI guidelines.
Provision of 81 will not apply on private
company.This rule will not also apply on
conversion of debentures into shares.
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8. Bonus shares are additional free shares issued to the
shareholder by the company. Profitable Companies in
India issue Bonus Shares.These are additional shares
issues given the shareholder without any cost to
existing shareholders.
Free shares of stock given to current
shareholders, based upon the number of shares that a
shareholder owns.While this stock
action increases the number of shares owned, it does
not increase the total value.This is due to the fact that
since the total number of shares increases, the ratio of
number of shares held to number of shares
outstanding remains constant.
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9. There are some conditions which need to be satisfied
before issuing Bonus shares
1) Bonus shares can be issued by a company only if the
Articles of Association of the company authorizes a bonus
issue.
2) It must be sanctioned by shareholders in general
meeting on recommendations of BOD of company.
3) Guidelines issued by SEBI must be complied with. Care
must be taken that issue of bonus shares does not lead to
total share capital in excess of the authorized share
capital. Otherwise, the authorized capital must be
increased by amending the capital clause of the
Memorandum of association.
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10. 4)If the company has availed of any loan from the financial
institutions, prior permission is to be obtained from the
institutions for issue of bonus shares.
5)If the company is listed on the stock exchange, the stock
exchange must be informed of the decision of the board
to issue bonus shares immediately after the board
meeting.
6)Where the bonus shares are to be issued to the non-
resident members, prior consent of the Reserve Bank
should be obtained.
7)Only fully paid up bonus share can be issued. Partly paid
up bonus shares cannot be issued since the shareholders
become liable to pay the uncalled amount on those
shares.
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11. a. Surplus in Profit & loss Account.
b. General reserve
c. Dividend Equalization reserve
d. Capital reserve
e. Debenture redemption reserve
f. Securities premium Account
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