The methods by which a company may issue its share capital are:
(1) By Private Subscription
(2) By Prospectus – A
prospectus contains particulars of the company and its business and must comply
with the comprehensive requirements of the CAMD 1990, the Stock Exchange and
Securities and Exchange Commission on which the shares are to be quoted. It is
published with an application form.
prospectus contains particulars of the company and its business and must comply
with the comprehensive requirements of the CAMD 1990, the Stock Exchange and
Securities and Exchange Commission on which the shares are to be quoted. It is
published with an application form.
Shares are allocated to those persons who applied. The Directors may
take the following decisions on share application;
take the following decisions on share application;
(a)
Accept them in full
Accept them in full
(b)
Accept them in part only or
Accept them in part only or
(c)
Reject them completely
Reject them completely
If the third decision is taken, a letter of regret is sent to the
subscriber.
subscriber.
(3) By offer for sale: – The whole issue of shares
is allotted to an issuing House (which may be a merchant bank) which then
offers them to the public by means of a document known as “Offer for sale”
which must comply with the same requirements as a prospectus.
is allotted to an issuing House (which may be a merchant bank) which then
offers them to the public by means of a document known as “Offer for sale”
which must comply with the same requirements as a prospectus.
(4) By Placing: – In a moderate – sized issue, stock brokers
acting for the company may place blocks of shares with their clients
(frequently with institutional investors such as insurance companies with large
funds to invest and arrange for the shares to be on the stock exchange. By this
means, much of the very heavy expense of a prospectus is avoided.
acting for the company may place blocks of shares with their clients
(frequently with institutional investors such as insurance companies with large
funds to invest and arrange for the shares to be on the stock exchange. By this
means, much of the very heavy expense of a prospectus is avoided.
(5) Bonus Shares: – For an existing company the directors may decide
to make a bonus issue of shares (sometimes referred to as a capitalization or
script issue of shares). This involves issuing new shares to shareholders in
proportion to their existing shareholdings.
to make a bonus issue of shares (sometimes referred to as a capitalization or
script issue of shares). This involves issuing new shares to shareholders in
proportion to their existing shareholdings.
The issue of share is made possibly by transferring from reserves an
amount equivalent to the nominal value of the shares issued.
amount equivalent to the nominal value of the shares issued.
Example
Emenco Enterprise PLC has
the following capital structure:
the following capital structure:
Revenue
reserves 20
reserves 20
—-
30
The directors decide to make 1 for 2 bonus issue of shares. A 1 for 2
issue means that one new share will be issued to a shareholder for every two
shares held. Thus, an issue of five million new ordinary shares will be made.
issue means that one new share will be issued to a shareholder for every two
shares held. Thus, an issue of five million new ordinary shares will be made.
In order to increase the share capital, a transfer from revenue reserves
will be made. The double entry is;
will be made. The double entry is;
Debit Revenue Reserve
Account
Account
Credit Share Capital
Account
Account
with the amount of the
bonus issue
bonus issue
After the bonus issue the
capital structure will be;
capital structure will be;
Revenue
reserves 15
reserves 15
—-
30
It is important to recognize that a bonus issue does not involve a
receipt of cash by the company from shareholders. The shares are distributed to
existing shareholders without any financial consideration on their part.
receipt of cash by the company from shareholders. The shares are distributed to
existing shareholders without any financial consideration on their part.
A bonus issue can be effected by a transfer from either capital or
revenue reserves. The transfer of revenue reserves to share capital account has
the effect of making a larger proportion of the capital base of the company
permanent, and, therefore, providing greater protection to creditors. The
receipt of bonus shares does not imply a windfall’ gain by shareholders. The
issue of bonus shares does not increase the assets or earning potential of the
company. As a result, the total value of the company, and therefore, the total
value of shares held by an investor in that company will remain the same after
the issue.
revenue reserves. The transfer of revenue reserves to share capital account has
the effect of making a larger proportion of the capital base of the company
permanent, and, therefore, providing greater protection to creditors. The
receipt of bonus shares does not imply a windfall’ gain by shareholders. The
issue of bonus shares does not increase the assets or earning potential of the
company. As a result, the total value of the company, and therefore, the total
value of shares held by an investor in that company will remain the same after
the issue.
Example
Austino PLC has 12 million N1 ordinary shares with a
market value ofN5 each. The directors have
decided to make a 1 for 4 bonus issue.
market value of
decided to make a 1 for 4 bonus issue.
Required:
Show the effect of bonus issue for an investor holding 100 shares in the
company.
company.
Solution
In this case, the total market value of the before the bonus issue is N60 million (that is, 12 million at N5 each). After the bonus issue, the total market
value should remain unchanged. However, a 1 for 4 bonus issue will result in a
total of 15 million ordinary shares in issue. This means that the market value
of each share will beN4 (that is, N60m/15m).
value should remain unchanged. However, a 1 for 4 bonus issue will result in a
total of 15 million ordinary shares in issue. This means that the market value
of each share will be
An investor holding 100 ordinary shares prior to the issue would
experience the following change:
experience the following change:
Shareholding prior to bond issue 100 at N5 each –
N500
Shareholding after bonus issue 125 at N4 each –
N500
The investor would, therefore, be no better off as a result of the
issue.
issue.
In practice, the value of a share following a bonus issue may settle at
a figure above the value which, in theory, it should settle at. This would mean
that the total value of shares held in the company would increase following the
bonus issue. There are a number of reasons why this situation may arise.
a figure above the value which, in theory, it should settle at. This would mean
that the total value of shares held in the company would increase following the
bonus issue. There are a number of reasons why this situation may arise.
A bonus issue of shares is sometimes offered to shareholders as an
alternative to a divided. The shareholder is, therefore, given a choice between
increasing his holding in the company or receiving a cash return. Those
shareholders who elect to receive shares rather than cash will increase the value
of their holdings at the expense of those who elected to receive a cash
dividend.
alternative to a divided. The shareholder is, therefore, given a choice between
increasing his holding in the company or receiving a cash return. Those
shareholders who elect to receive shares rather than cash will increase the value
of their holdings at the expense of those who elected to receive a cash
dividend.