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Limited

Companies
Bonus shares and rights
issues
Share capital of public limited
companies
A company may:
Increase its share capital by the issue of new shares
Consolidate its shares into shares of a larger amount than its existing
shares (e.g. if it has a share capital of 10,000 ordinary shares of RM 1,
it can convert them into either 2000 shares of RM 5 or 1000 shares of
RM 10)
Divide its shares into shares of a lower denomination (e.g convert its
ordinary share capital of 10,000 ordinary shares of RM 1 into 20,000
shares of RM0.50 or 40,000 shares of RM0.25)
Issue bonus shares
Issue rights shares
Reduce its capital by redeeming or purchasing its shares provided it
complies with the Companies Act
Please refer to the Malaysian Companies Act
1965 (including the amendments up to 1
January 2006) on eLearn (10-16 October
2016)
Bonus Shares
Ifthe market value of acompany's shareis very high, it may not appeal to
small investors (par value RM1 vs MV of RM 25).
By issuingbonus shares, the rate of dividend is lowered down (due to the
number of shareholders have increased and with the same amount of
reserves to distribute as dividends to the increased number of
shareholders) and consequentlyshareprice in the market is also
brought down to a desired range of activity and thus trading activity
would increase (due to the cheaper share price) in thesharemarket.
Some companies make bonus issues to create a wider ownership base,
improve the affordability of the shares and increasing the volume of shares
traded.
You may refer to the definition of bonus shares on the Bursa
Malaysia website
http://www.bursamalaysia.com/market/securities/education/investin
g-basics/types-of-stocks
/

Further explanation on Bonus shares on the Investopedia website


http://www.investopedia.com/terms/b/bonusissue.asp

Watchit on YouTube - https://


www.youtube.com/watch?v=j4C7dRdo-ro
Advantages to Company of Issue Bonus
Shares
(i) Conservation of Cash.The issued bonus
shares allows the company to declare a dividend
in lieu of cash that may be used to finance
profitable investment opportunities, thus the
company can maintain its liquidity position.

(ii) Under Financial Difficulty and


Contractual Restrictions.When a company
faces stringent cash difficulty and is not in a
position to distribute dividend in cash, or where
certain restrictions to pay dividend in cash are
put under loan agreement, the only way to
satisfy the shareholders or to maintain the
confidence of the shareholders is the issue of
bonus shares.
Advantages to Company of Issue Bonus
Shares
(iii) Remedy for Under-Capitalisation.In the state of under-
capitalisation, the rate of divided is very much high due to the
high market value of shares and profitability of the company. In
order to lower down the rate of dividend, the company issued
bonus shares instead of paying dividend in cash. A company is
said to be under- capitalised when it is earning exceptionally
higher profits as compared to other companies or the value of its
assets is significantly higher than the capital raised within a
short period of time resulting in negative cash flow due to
efficient management. Cause of under-capitalisation?
Efficient management, conservative dividend policy in
the previous years.

(iv) Widening the Share Market.If the market value of a


company's share is very high, it may not appeal to small
investors. By issuing bonus shares, the rate of dividend is
lowered down and consequently share price in the market is also
brought down to a desired range of activity and thus trading
activity would increase in the share market. Now small investors
may get an opportunity to invest their funds in low priced
shares.
Advantages to Company of
Issue Bonus Shares
(v)Economical Issue of
Securities.The cost of issue of bonus
shares is the minimum because no
underwriting commission, brokerage
etc. is to be paid on this type of issue.
Existing shareholders are allotted bonus
shares in proportion to their present
holdings.
Activity 1 Bonus issues
Statement of Financial Position RM000
(SOFP)
Non-current assets 1400
Net current assets 350
1750
Equity
Ordinary shares of RM 1 800
Share premium 200
Revaluation reserve 600
General reserve 100
Retained earnings 50
1750
The directors have decided to make a bonus issue of three
new shares for every four held.
Required: redraft the SOFP to show the effect after
the issue of bonus shares.
Rights Issues
Cash-strapped companies can turn torights issuesto raise money when they
really need it. In these rights offerings, companies grant shareholders a chance
to buy new sharesat a discountto the current trading price.
Offering rights issue to the existing shareholders is a signal to the public that
the company is in financial distress.
A rights issue is an invitation to existing shareholders to purchase additional
new shares in the company. More specifically, this type of issue gives existing
shareholders securities called "rights", which, well, give the shareholders the
right to purchase new shares at a discount to themarket priceon a stated
future date.
You may refer to the definition of rights issue on the Bursa Malaysia
website
http://www.bursamalaysia.com/market/securities/education/investing-ba
sics/types-of-stocks
/

Further explanation on Rights Issues on the Investopedia website


http://www.investopedia.com/terms/r/rightsoffering.asp

Watch it on YouTube - https://www.youtube.com/watch?v=6d6j2vchCHg


Rights Issue - Example
You own 1,000 shares in W Telecom (WT), each of
which is worth $5.50. The company is in a bit of
financial trouble and needs to raise cash to cover its
debt obligations.
WT therefore announces a rights offering, in which it
plans to raise $30 million by issuing 10 million
shares to existing investors at a price of $3
each.
But this issue is a three-for-10 rights issue. In
other words, for every 10 shares you hold, WT is
offering you another three at a deeply
discounted price of $3.This price is 45% less than
the $5.50 price at which WT stock trades.
As a shareholder, you essentially have three options
when considering what to do in response to the rights
issue. You can (1) subscribe to the rights issue in
full, (2) ignore your rights or (3) sell the rights
to someone else. Here we look how to pursue each
option, and the possible outcomes.
Rights Issue - Solution
1. Take up the rights to purchase in full.
To take advantage of the rights issue in full, you would need to spend
$3 for every WT shares that you are entitled to under the issue. As
you hold 1,000 shares, you can buy up to 300 new shares (three
shares for every 10 you already own) at this discounted price of $3,
giving a total price of $900.

2. Ignore the rights issue


You may not have the $900 to purchase the additional 300 shares
at $3 each, so you can always let your rights expire. But this is not
normally recommended. If you choose to do nothing, your shareholding
will be diluted thanks to the extra shares issued.

3. Sell your rights to other investors


In some cases, rights are not transferable. These are known as "
non-renounceable rights". But in most cases, your rights allow you to
decide whether you want to take up the option to buy the shares or sell
your rights to other investors or to theunderwriter. Rights that can be
traded are called "renounceable rights", and after they have been
traded, the rights are known as "nil-paid rights".
Rights and bonus issues compared

Rights Issue Bonus Issue


Subscribers pay for shares Shareholders do not pay for
shares
The companys assets are The net assets of the
increased by the cash company are unchanged
received
Shareholders do not have All the ordinary
to exercise their rights to shareholders will receive
subscribe for the new their bonus shares
shares
Shareholders may sell their Shareholders may sell their
rights if they do not wish to bonus shares if they do not
exercise them wish to keep them
Activity 2: Bonus shares and rights issues (1)
RM000
Net Assets 1600
Share capital and reserves
Ordinary shares of RM1 1000
Share premium 400
Retained earnings 200
1600

The Statement of Financial Position of H Ltd at 1 April 2016


is shown above. On 1 April 2016, the directors made a bonus
issue of shares on the basis of one new share for every two
already held.
Required:
(a) Redraft the SOFP of H Ltd at 1 April 2016 after the
issue of bonus shares.
Activity 2: Bonus shares and rights issues (2)
Following the bonus issue, H Ltd made a
rights issue on 7 April 2016 of 150,000
ordinary shares of RM1 at a price of
RM1.50. All the shares were subscribed
for by the shareholders.
Required:
Redraft H Ltds Statement of
Financial Position at 7 April 2016
after the completion of rights issue.
Test your understanding: Bonus shares and
rights issues (1)
RM000
Net Assets 2000
Share capital and reserves
Ordinary shares of RM1 1000
Share premium 500
Revaluation reserve 300
General reserve 120
Retained earnings 80
2000
The Statement of Financial Position of Z Ltd at 1 July 2016 is shown
above. On 1 July 2016, the directors made a bonus issue of shares
on the basis of four new shares for every five already held.
Required:
(a) Redraft the SOFP of Z Ltd at 1 July 2016 after the issue
of bonus shares.
Test your understanding: Bonus shares and
rights issues (2)
Following the bonus issue, Z Ltd made a
rights issue on 7 July 2016 of one new
share for every three shares already
held. The shares were offered at a price
of RM1.25 per share. All the shares were
taken up.
Required:
Redraft Z Ltds Statement of
Financial Position at 7 July 2016
after the completion of rights issue.
Q & A session