Comprehending the Right Issue of Shares & Bonus Issue of Shares

Key Highlights

• A right issue of shares is a method by which a company can raise fresh equity capital. In this process, the company offers its existing shareholders the right to purchase additional shares at a price lower than the current market price.

The right issue of shares is a fundamental aspect of corporate finance and equity management, offering existing shareholders the opportunity to purchase additional shares directly from the company, typically at a discounted rate. This strategic move is designed to raise additional capital for various corporate purposes, such as expansion, debt reduction, or improving the company's financial health.

What is the Right Issue of Shares?

A right issue of shares is a method by which a company can raise fresh equity capital. In this process, the company offers its existing shareholders the right to purchase additional shares at a price lower than the current market price. These rights are usually provided in proportion to the existing holdings of the shareholders. For instance, if a shareholder holds 100 shares and the company announces a 1:2 right issue, the shareholder can purchase an additional 50 shares at the specified price.

The primary objective behind the right issue is to enable companies to raise the necessary funds without resorting to external financing sources, such as loans or new investors. This not only helps in maintaining the ownership structure but also ensures that existing shareholders have the first right to increase their stake in the company.

Right Issue of Shares under Companies Act, 2013

The regulatory framework for the right issue of shares is controlled by the Companies Act, of 2013. According to Section 62 of the Companies Act, 2013, when a company proposes to increase its subscribed capital by issuing further shares, they must be offered to the existing shareholders in proportion to their existing holdings. This offer must be communicated to the shareholders by a notice specifying the number of shares offered and the period within which the offer must be accepted, which cannot be less than 15 days and not more than 30 days from the date it was offered.

The act ensures transparency and fairness in the process, protecting the interests of existing shareholders. It mandates that the right issue must be fully backed by the company's board resolution and must comply with the provisions related to pricing, valuation, and shareholder communication.

Issue of Shares: A Broader Perspective

The issue of shares is a broader term encompassing various methods through which a company can raise capital by offering equity to investors. Apart from the right issue, companies can also issue shares through public offerings, private placements, preferential allotments, and employee stock options.

Each method of share issuance serves different strategic purposes. Public offerings are often used when a company wants to raise a substantial amount of capital from a wide base of investors. Private placements and preferential allotments, on the other hand, are targeted towards specific investors, such as institutional investors or high-net-worth individuals, offering them shares at a pre-negotiated price.

Bonus Issue of Shares

In contrast to the right issue, a bonus issue of shares involves the distribution of additional shares to existing shareholders without any cost. This is typically done by capitalizing the company's reserves. A bonus issue increases the total number of shares held by each shareholder, thereby reducing the share price and making it more affordable for retail investors without altering the overall value of the holdings.

A bonus issue can be seen as a reward to existing shareholders, reflecting the company’s strong financial health and its confidence in future earnings. While it does not directly raise fresh capital, it enhances the liquidity and marketability of the shares.

Data and Trends

Recent data suggest that right issues have been a preferred method for companies, especially in sectors requiring significant capital investments, such as infrastructure, real estate, and banking. For instance, during the financial year 2020-2021, several Indian companies, including major banks, raised substantial capital through the right issues to strengthen their balance sheets in response to economic challenges posed by the COVID-19 pandemic.

A key trend observed is that companies often use a combination of the right issues and other capital-raising methods to optimize their financial strategies. The choice between the right issue and other methods often depends on the company’s current financial position, market conditions, and long-term strategic goals.

Apprehending the right issue of shares is important for both corporate leaders and investors. For companies, it offers a flexible and shareholder-friendly way to raise capital, ensuring that existing investors have the first right to participate in the company’s growth. For shareholders, it provides an opportunity to increase their holdings at a favorable price, contributing to long-term wealth creation.

The regulatory framework under the Companies Act, 2013, ensures that the process is conducted transparently and equitably, protecting the interests of all stakeholders. As companies navigate the complexities of capital markets, the right issue remains a vital tool in their financial arsenal, balancing the need for fresh capital with the imperative of maintaining shareholder value.