1. Right shares and bonus shares
Company accounts
Right shares and bonus shares

2. Right Issue or Pre-emptive Right
Subsequent issue of shares by an existing company to existing shareholders are known as rights issue.

3. Right issue according to sec 81
Section 81 of the Companies Act,1956 provides:
Where at any time after the expiry of two years from the formation of a company or the expiry of one year from the first allotment of shares in the company, whichever is earlier,

4. Subscription of capital
Offer to the existing shareholders
Proportionate issue
Offer by at least 15 days notice
Right to renounce
Right to dispose

5. Exceptions as per sebi section 81
Rights issues should not be kept open for more than 60 days.
Nothing in Section 81 shall apply:
To a private company ;
To the increase of the subscribed capital of a public company caused by an exercise of an option attached to debentures issued or loans raised by the company.

6. Advantages of Rights Issue
Retention of control in the hands of existing shareholders
Better rapport
More certainty
Directors cannot be biased
The expenses to be incurred, if shares are offered to the general public.

7. Valuation of Shares
The right can be valued in terms of money as below:
Calculate the market value of shares which an existing shareholder is required to have in order to get fresh shares.
Add to the above price paid for the fresh shares.
Find out the average price of existing shares and fresh shares.
The average price of the share should be deducted from the market price and the difference thus ascertained is value of right.

8. The value of the right can also be calculated by :
R = M-S / N+1
R= Value of one right share.
M= Cum-right market price of share.
S= Subscription price or issue price for a new share.
N= Number of old shares required to purchase one right share.

9. Illustration :
A company is planning to raise funds by making rights issue of equity shares to finance its expansion. The existing equity share capital of the company is Rs. 50,00,000. The market value of the share is Rs. 42. The company offers to its shareholders the right to buy 2 shares at Rs. 11 each for every 5 shares held. You are required to calculate: a. theoretical market price after rights issue b. the value of right and percentage increase in capital.

10. Solution: Market Price of 5 shares held @ Rs. 42 = Rs. 210 Add:
Amt to be paid for acquiring 2 more shares= Rs.22
Total price of 7 shares after rights issue= Rs. 232
Therefore,
theoretical MP of one share = 232/7= Rs
Value of right= MP – Theoretical MP
42 – = Rs. 8.86

11. Percentage increase in share capital :-
Present Capital= Rs.50,00,000
Rights issue Rs. 50,00,000 * 2/5= Rs.20,00,000
Percentage increase in Share Capital
(20,00,000/50,00,000 * 100) = 40%

12. Illustration:- A company offers to its shareholders the right to buy one share of Rs . 20 Rs. 41 for every two shares held .The company declared a dividend of Rs 3 last year. On the declaration of dividend and recommendation of the right, there shares are Rs. 53 cum dividend and cum right. calculate the value of right?

13. Solution
market value(cum dividend and cum right) =Rs.53 Less: Dividend per share =Rs.3 Market value (cum right ) each share =Rs.50 Market value of two shares(Rs.50*2) =Rs.100 Add: amt paid for 1 share =Rs.41 Value of 3 shares =Rs.141 Average price per share(Rs.141/3) =Rs.47 Value of Right Share=MP-AP =50-47= Rs.3

14. Bonus Shares or Capitalization of Profits
A company gives cash bonus to its shareholders only when it has larger reserves and sufficient cash to pay bonus. On the other hand, capital bonus is paid when the company wants to share the accumulated reserves with shareholders but it is not in a position to pay cash bonus because it adversely affects the working capital of the company.

15. Capitalization of profits may be done in two ways:-
By making partly paid up share fully paid up.
By issuing fully paid bonus shares to existing shareholders free of cost

16. Circumstances for issue of bonus shares
Accumulated large reserves
Company not in a position to give cash bonus
When value of fixed asset exceeds the amount of capital
To tackle the problem of shareholders demanding the same rate in future
Big difference between market value and paid up value of shares

17. Provisions of companies act regarding issue of bonus shares
Section 205(3), 78(2) and 80(5) of companies act, 1956 and regulation 96 and 97 of table A make provisions of bonus share.
Section 205(3) provides that a company may capitalize its profits or reserves for the purpose of issuing fully paid bonus shares or pay up any amount for the time being unpaid.
Section 78(2) provides that the securities premium may be applied in paying up unissued shares of the company as fully paid bonus shares to its members.
Section 80(5) provides that the CRR may be applied by the company in paying up unissued shares to be issued as fully paid bonus shares to its members.

18. SEBI guidelines for Issue of Bonus Shares
made out of free reserves .
Reserves created by revaluation of Fixed Assets are not capitalized.
The declaration of bonus issue, in lieu of dividend, is not made.
The bonus issue is not made unless the partly paid-up shares, if any existing, are made fully paid-up.
A company must have approval within the six months.

19. the company shall pass a resolution for making provisions in the Articles of Association for capitalization.
resolution shall be passed by the company for increasing the authorized capital
the rate of dividend to be declared in the year immediately after the bonus issue should be indicated in the AGM
No bonus issue will be made which will dilute the value of rights of the holders of debentures, convertible fully or partly.

20. Free Reserves that can be used for Issue of Bonus shares :
Surplus in Profit and Loss account.
General Reserve
Dividend equalization reserve.
Capital reserve arising from profit on sale of fixed assets received in cash.
Balance in debenture redemption reserve after redemption of debentures.
Capital Redemption Reserve A/c created at the time of redemption of redeemable preference shares out of the profits.
Securities Premium collected in cash only.

21. Accounting Treatment:
If bonus is utilized by making existing partly paid shares as fully paid:
Profit & Loss A/c Dr.
Or General Reserve A/c Dr.
Or Capital Profit A/c Dr.
To Bonus to Shareholders A/c
(Being amount transferred for bonus payable to shareholders)
2. Share Final Call Account Dr.
To Share Capital A/c
(Being final call due on shares)
3. Bonus to shareholders A/c Dr.
To Share Final Call A/c
(Being bonus to shareholders utilized to make the final call paid-up)

22. B) If the payment of bonus is made by the issue of free fully paid bonus shares:
Profit & Loss A/c Dr.
Or General Reserve A/c Dr.
Or CRR A/c Dr.
Or Securities Premium A/c Dr.
Or Capital Reserve A/c Dr.
Or Any Other reserve A/c Dr.
To Bonus to Shareholders A/c
(Being amount transferred for issue of bonus shares)
Bonus to Shareholders A/c Dr.
To Share Capital A/c
To Securities Premium A/c
(Being issue of bonus shares at a premium)

23. Difference between bonus and right shares
Bonus shares
Existing shareholders will have to pay.
can be fully as well as partly paid up.
Regulated by sec 81 of companies act.
Subject to minimum subscription
No separate price for transfer
Issued to existing shareholders free of cost.
Always fully paid up.
Acc. to the provisions of AOA and SEBI guidelines
No minimum subscription.
Separate price for transfer.

24. Illustration :- The following figures have been extracted from the books of ABC Ltd. As at 31/3/2008: Rs. Authorized Capital: 50,00,000 Equity 5,00,00,000 Issued and Subscribed Capital: 45,00,000 Equity 10 4,50,00,000 (fully paid) Reserves and Surplus: General Reserve 50,00,000 Profit and Loss A/c 1,10,00,000 Capital Reserve 30,00,000 Securities Premium 15,00,000 14% partly convertible each 1,25,00,000 The company decided to capitalize its reserves by way of bonus issue at the rate of one share for every 4 shares held. Capital reserve includes Rs. 20,00,000 profit on sale of fixed assets. It may be assumed that securities premium has been realizes in cash .

25. 40% of 14% Debentures are convertible into equity shares of Rs
40% of 14% Debentures are convertible into equity shares of Rs. 10 each fully paid on 30th September, 2008.
Show the necessary Journal entries in the books of company and prepare the extract of the balance sheet immediately after the bonus issue but before conversion of debentures.
Solution:-
Date a) b)
Particulars
Capital Reserve A/c Dr.
Securities Premium A/c Dr.
General Reserve A/c Dr.
Profit & Loss A/c Dr.
To Bonus to Shareholders A/c
(Being bonus share for every 4 shares held by utilizing various reserves as per Board’s resolution dated…)
Bonus to Shareholders A/c Dr.
To Equity Share capital A/c
(Being issue of 11,25,000 bonus shares of
Rs. 10 each fully paid up.)
Debit amt.
20,00,000
15,00,000
50,00,000
27,50,000
1,12,50,000
Credit Amt.

26. Balance Sheet (extract) as on ………. (after Bonus Issue)
Particulars
Authorized Capital:
62,50,000 Equity Rs. 10 each
Issued and Subscribed Capital:
56,25,000 Equity 10 each, fully paid-up (Out of the above, 11,25,000 equity shares of Rs 10 each have been issued as fully paid bonus shares)
Reserves and Surplus:
Capital Reserve
Profit & Loss A/c
Secured Loan:
14% Partly Convertible Rs 100 each.
Amount
6,25,00,000
5,62,50,000
10,00,000
82,50,000
1,25,00,000

27. Notes:
It is assumed that the company will pass necessary resolution at its general body meeting for increasing the authorized capital. Figure of increased authorized capital may be as follows:
Existing no. of Equity Shares as issued 45,00,000
Add: Issue of Bonus shares 11,25,000
No. of shares to be issued to
Convertible Debenture holders 5,00,000
(1,25,00,000/10*40/100)
Number of Bonus Shares to be issued to debenture holders for conversion As per SEBI guidelines
(1,25,00,000/4*40%/10) 1,25,000
62,50,000

28. Miscellaneous Illustrations:- Illustration 5: The Balance Sheet of Zee Ltd. as on 31/3/2008 is given below:
Liabilities
Issued and paid-up share capital:
20,000 Equity Rs. 10 each
Profit & Loss Appropriation A/c
6% Redeemable Debentures
Current Liabilities & Provisions :
Sundry Creditors
Amount
2,00,000
1,80,000
1,20,000
1,00,000
6,00,000
Assets
Freehold Property
Stock in trade
Sundry Debtors
Cash and Bank Balance

29. It was resold at the annual general meeting:
To pay a dividend of 10%
To issue one bonus share for every four shares held.
To give existing shareholders the option to buy one Rs 10 share at Rs. 14 for every four shares held prior to bonus distribution.
To repay the debentures at a premium of 4%
All the shareholders took up the option in three above. Prepare appropriate journal entries and draw up the Balance sheet after the above transactions have been given effect to. (ignore taxation).

30. Illustration :-
The Company wanted to issue bonus shares to its shareholders at the rate of one share for every two shares held. Necessary resolutions were passed; requisite legal requirements were complied with.
You are required to give effect to the proposal by passing journal entries in the books of A Ltd.
Show the amended Balance Sheet.
The Balance Sheet of A Ltd. As on 31/3/2008 is as follows:

31. Balance Sheet of A Ltd. As on 31st March, 2008
Liabilities
Authorized Share capital:
1,50,000 Equity shares of Rs. 10 each
Issued, Subscribed and Paid-up :
80,000 Equity Shares of Rs.10 each, Rs each called-up and paid-up
Reserves:
Capital Redemption Reserve
Plant revaluation reserve
Securities Premium A/c
Development Rebate Reserve
Investment Allowance Reserve
General Reserve
Amount
15,00,000
6,00,000
1,50,000
20,000
2,30,000
2,50,000
3,00,000
17,00,000
Assets
Sundry Assets

32. Solution: Date a) b) c) d) Particulars Share final call A/c Dr.
To Equity Share Capital A/c
(Being Final call made on 80,000 Rs each)
General Reserve A/c Dr.
To Bonus to Shareholders A/c
(Being transfer from General Reserve to make partly paid-up shares fully paid-up)
Bonus to shareholders A/c Dr.
To Share Final Call A/c
(Being the amount due on final call adjusted against transfer from General reserve)
Securities Premium A/c Dr.
Capital Redemption Reserve A/c Dr.
(Being Appropriation made to facilitate issue of bonus shares ) Lf
Debit Amt.
2,00,000
1,00,000
1,50,000
Credit Amt.
4,00,000

33. Balance Sheet (after Bonus Issue)
Bonus to Shareholders A/c Dr.
To Equity Share Capital A/c
(Being issue of 40,000 fully paid-up shares of Rs. 10 each by way of bonus)
4,00,000
Balance Sheet (after Bonus Issue)
Liabilities
Share Capital- authorized :
1,50,000 Equity Shares of Rs. 10 each
Issued and Subscribed :
1,20,000 Equity Shares of Rs. 10 each fully paid
Reserves and surplus :
Development rebate reserve
Investment Allowance Reserve
Plant Revaluation Reserve
Amount
15,00,000
12,00,000
2,30,000
2,50,000
20,000
17,00,000
Assets
Sundry assets