Corporate Reporting - Limited Companies: Bonus and Rights Issues

1. Limited
Companies
Bonus shares and rights
issues
CORPORATE REPORTING

2. 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)

3. Bonus Shares
 If the market value of a company's share is very high, it may not
appeal to small investors (par value RM1 vs MV of RM 25).
 By issuing bonus 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 consequently share price 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
the share market.
 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/inve
sting-basics/types-of-stocks/
 Further explanation on Bonus shares on the Investopedia
website http://www.investopedia.com/terms/b/bonusissue.asp
 Watch it on YouTube -
https://www.youtube.com/watch?v=j4C7dRdo-ro

4. 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.

5. 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.

6. 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.

7. Activity 1 – Bonus issues
Statement of Financial Position (SOFP) RM000
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.

8. Rights Issues
 Cash-strapped companies can turn to rights issues to raise money when they
really need it. In these rights offerings, companies grant shareholders a chance
to buy new shares at a discount to 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 the market price on 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-
basics/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

9. 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.

10. 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
the underwriter. Rights that can be traded are called "renounceable rights", and
after they have been traded, the rights are known as "nil-paid rights".

11. Rights and bonus issues compared
Rights Issue Bonus Issue
Subscribers pay for shares Shareholders do not pay for
shares
The company’s assets are
increased by the cash received
The net assets of the company
are unchanged
Shareholders do not have to
exercise their rights to
subscribe for the new shares
All the ordinary shareholders
will receive their bonus shares
Shareholders may sell their
rights if they do not wish to
exercise them
Shareholders may sell their
bonus shares if they do not
wish to keep them

12. 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.

13. 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 Ltd’s Statement of Financial
Position at 7 April 2016 after the
completion of rights issue.

14. 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.

15. 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 Ltd’s Statement of Financial
Position at 7 July 2016 after the
completion of rights issue.

16. Q & A session