Subsequent issue of shares by an existing company to
existing shareholders are known as rights issue.
 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,
the Board of Directors, decide to increase the subscribed
capital of the company by the allotment of further shares ,
then:
1. Such further shares shall be offered to the existing
shareholders proportionately to their equity holdings on
that date.
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2. The offer shall be made by a notice.
3. Unless the Articles of Association of the
company otherwise specify, the offer shall be
deemed to include a right exercisable by the
person concerned to renounce the shares.
4. Incase the shareholders declines to accept the
shares offered, the Board of Directors may
proceed to dispose off such shares offered in
such manner as they consider most beneficial to
the company.
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The control of the company is retained in the
hands of the existing shareholders.
The existing shareholders do not suffer on
account of dilution in the value of their holdings if
fresh shares are offered to them because value
of shares is likely to fall with fresh issue.. This
decrease in the value of the shares will be
compensated by getting new shares at a price
lower than the market price.
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The expenses to be incurred, if shares are
offered to the general public, are avoided.
Image of the company is bettered as existing
shareholders remain satisfied.
There is more certainty of getting capital by
rights issue than by when fresh issue of
shares made to public.
Directors cannot misuse the opportunity of
issuing new shares to their friends and
relatives.
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M-S
N+1
R=Value of one right share
M=Cum- right market price of a share
S= Subscription price for a new share
N=Number of old shares required to purchase one
right share
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R =
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
The ex-right value of a share can be calculated
by deducting the value of right from the cumright market price of the share
P = MN+S
N+1
P=Market value of share ex-right
M=Cum –market price
S=Issue price of a new share
N=Number of existing shares required for getting
one right share
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Bonus paid to shareholders can be either cash or
capital bonus.
A company gives bonus to its shareholders only
when it has larger reserves and sufficient cash to
pay bonus.
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.
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Capitalisation of profits can be done in two ways:
(i)
(ii)
By making partly paid shares as fully paid.
By issuing fully paid bonus shares to existing
shareholders free of cost.
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When a company has large accumulated reserves
(whether capital or revenue).
When the company is not in a position to give
cash bonus.
When the value of fixed assets far exceed the
amount of the capital.
When the higher rate of dividend is not advisable
because shareholders will demand the same rate
in future which the directors may not be able to
give.
When the market price of shares far exceeds the
paid up value of shares.
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Surplus in Profit and Loss A/c.
General Reserve.
Dividend Equalisation 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.
Securities premium collected in cash only.
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Capital Reserve arising due to revaluation of
assets.
 Securities Premium arising on issue of shares on
amalgamation or take over.
 Investment Allowance Reserve/ Development
Rebate Reserve before expiry of 4 years of
creation.
 Balance in Debenture Redemption Reserve
account before redemption takes place.
 Surplus arising from a change in the method of
charging depreciation.
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(A) If the bonus is utilised by making existing partly paid
shares fully paid shares:
(i)
Profit and Loss A/c
Dr.
General Reserve A/c
Dr.
Capital Profit A/c
Dr.
To Bonus to Shareholders A/c
(Being amount transferred for bonus payable to
shareholders)
(ii)
Share Final Call A/c
To Share Capital A/c
(Being final call due on shares)
Dr.
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(iii)
Bonus to shareholders A/c
To Share Final Call A/c
Dr.
(Being bonus to shareholders utilised to make the final call
paid –up)
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(B) If the payment of bonus is made by the issue of free fully paid bonus
shares:
(i)
Profit and Loss A/c
Dr.
General Reserve A/c
Dr.
Capital Redemption Reserve A/c
Dr.
Securities Premium A/c
Dr.
Capital Reserve A/c
Dr.
Other reserve A/c
Dr.
To Bonus to Shareholders Account
(Being amount transferred for issue of bonus shares)
(ii)
Bonus to Shareholders A/c
To Share Capital A/c
To Securities Premium A/c
Dr.
(Being issue of bonus shares)
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Bonus Shares
Right Shares
Bonus Shares are issued to the Existing shareholders have to
existing shareholders free of pay for taking right shares.
cost.
No facility for renunciation is Shareholders may renounce the
available.
right shares partly or totally.
Bonus Shares are always fully Right Shares can be fully paid
paid up.
up or partly paid up.
Issue of Bonus Shares is Issue of right shares is regulated
according to the provisions of by Section 81 of the Companies
AOA and SEBI guidelines.
Act.
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bonus shares
right shares
Issue of bonus shares do not Issue of right shares increases
increase cash because shares working capital
are issued free of cost.
There is no requirement of Issue of right shares is subject
minimum subscription
to minimum subscription
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There is a sharp rise in the prices of equity shares following
the declaration of bonus issue.
After the issue of Bonus Shares , other things remaining the
same, the price of shares will come down.
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