Download What is a rights issue of shares?

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Allotment of Shares
Application for allotment of shares
Restrictions as to allotment
Repayment as to allotment
Effect of irregular allotment
Repayment of money received but shares not
allotted
Return of allotment
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Once a public company has decided to issue
further share capital, it has to decide a subscription
price.
The shares can be issued
◦ at par,
◦ premium
◦ discount.
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The typical par in Pakistan is Rs 10,
◦ therefore, a company can issue shares at Rs 10, above Rs
10, or below Rs 10.
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When its share is selling below par in the market,
the issuer would have to consider offering them
below par, i.e., at a discount, otherwise
shareholders would be unlikely to subscribe.
CURRENT PROCEDURES
Public companies are allowed to issue shares at a
discount from par under section 84 of the Companies
Ordinance 1984 but only after fulfilling some legal
requirements. There are two scenarios:
1. If the discount rate is 10% of par or less,
a) then issuer first takes the approval from its shareholders
by means of a special resolution in a general meeting
b) and then takes the approval from Securities & Exchange
Commission of Pakistan (SECP)..
If the discount rate is more than 10% of
par,
2.
then the issuer first takes the approval from
SECP
b) and then from its shareholders.
a)
When company issues the shares, it has to fix the
price of per share.
◦ If the face value and issue price per share will equal, then it
is called that shares have been issued at par. Issue price
will not always equal to the face value per share.
◦ If issue price is more than face value, then shares will be
issue at premium.
◦ If issue price is less than face value, then shares will issue
at discount.
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To understand the issue of shares at par, we have to
understand the face value of per share.
Concept of face value came from currency.
◦ In the beginning of time, we used Gold Currency. Because
Gold was cheap. Market fixed the price of Gold and printed
Rs. 1 on the Gold Coin. It was its face value, but after
sometime, Gold's price increased. Same 1Rs. Gold Coin's
value became 200 Rs. current paper currency. Still face value
of 1 Rs. Gold coin is Rs. 1 but market value is different
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Like this, each share's face value is fixed by
company and other outside factors.
When it fixes, a company can issue his share on this
price or less than this price or more than this price.
If face value per share and issue price per share will
equal then it will be issue of share at par.
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In accounting treatment, when we see par value.
◦ For example, it is Rs.100. Now, classify this money in
application money, allotment money and call money.
 For example, we have to take Rs.50 at the time of
application. It will be application money.
 If we have to take Rs.25 per share at the time of allotment
of shares, we will say it allotment money per share.
 If we have to take balance in call, then balance Rs.25 per
share will be call money.
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When shares are issued at an amount less than its
face value is called issuance of shares at “discount.”
When shares are issued at an amount more than its
face value is called issuance of share at “premium.”
Issuance of share at premium is the most prevalent
mode of issue.
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When shares are issued at premium an amount
equal to premium shall be transformed to an
account “share premium account”.
Procedure of issuance of shares at premium:
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Check authorized capital, if insufficient, increase it.
Convene the board meeting and approve the
purpose of share of issue.
In case of listed entity, intimate to stock exchange,
about the particulars of issue after board meeting.
Procedure of issuance of shares at premium:
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File form 23 with in 30 days.
File form 2 with in 30 days of allotment.
Pass special resolution and forward the proceeding
to stock exchange
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Discount can be authorized by resolution passed in
general meeting.
It must be sanctioned by the commission.
The resolution must specify the maximum rate of
discount at which the shares are to be issued.
At least one year should have been elapsed from
the date of commencement of business.
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It is issued with in 60 days from date of sanction of
the commission. The commission may extend this
period.
Every prospectus and balance sheet issued after
such issue must contain the particulars of discount
allowed on issue of shares.
Issue of shares at discount shall not be deemed to
be reduction of share capital
Following conditions should be fulfilled for it:
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The loan should be from a scheduled bank or financial
institution.
In case of granting option to convert, the term of loan
should not be less than three years.
What is a rights issue of shares?
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A rights issue is when a company issues its
existing shareholders a right to buy additional
shares in the company.
◦ The company will offer the shareholder a specific number
of shares at a specific price.
◦ The company will also set a time limit for the shareholder
to buy the shares.
◦ The shares are often offered at a discounted price to
encourage existing shareholders to take the company up on
their offer.
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Simply when directors decide to increase the
capital of the company by issue of further
shares, such share shall be first offered to the
existing shareholders in proportion to their
existing shareholdings.
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A company will offer more shares to its shareholders
to raise extra money for the company.
Companies with a poor cash flow will often use a
rights issue to increase cash flow and pay off existing
debts.
Rights issues however are sometimes issued by
companies with healthy balance sheets in order to
fund research and development projects or to
purchase new companies.
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Rights issue involves shares being offered to existing
shareholders at a discount to the current trading
price, for the purpose of raising funds for the
company.
In other words, we can say that rights issue gives
shareholders a chance to increase their exposure to
the stock at a discounted price.
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Rights issue is a way for companies to raise capital.
◦ Capital is raised when investors pay for the new shares that
are being issued.
◦ Companies can use the raised capital
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to acquire assets,
make a take-over,
repay debts
or save themselves from bankruptcies.
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Discounted shares issued by a company can be
tempting but it is important to find out first the
reason for the rights issue of shares.
◦ A company, for example, may be using the rights issue as a
quick cash fix to pay off debts masking the real reason for the
company’s cash flow failing such as bad leadership.
◦ Caution is advised when offered with a rights issue.
A public company can further raise its capital
without issue of right shares
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By passing special resolution and after the approval of
the Federal Government
Or can offer a certain percentage of its shares to its
employees under the employees stock option scheme.
Definition of 'Share Certificate'
A share certificate is a written document signed on
behalf of a corporation, and serves as legal proof
of ownership of the number of shares indicated.
Also referred to as a "stock certificate".
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A share certificate is a document issued under the
common seal of the company.
A share certificate is a document of title of the
shares held in a company.
It is the prima facie evidence of the title of the
member to the shares.
It includes:
 Name and address of the holder
 The number of shares held by him
 Their distinctive numbers
 The amount paid-up thereon
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Duplicate share certificate shall be issued with in
45 days from the date of application after inquiry
that original share certificate has been lost.
If a company is unable to issue duplicate
certificates it shall notify this fact with in 30 days,
The company shall not charge fee exceeding the
sum prescribed and the actual expenses incurred.
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A commission is a fee paid to an agent as
compensation for executing a transaction. It
is calculated either as a percentage of the
transaction value or as a flat fee.
Conditions:
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The payment of such commission is authorized by
the articles.
Commissions does not exceed the rate fixed by the
commission.
Conditions:
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Amount and rate of commission is disclosed in the
prospectus or statement in lieu of prospectus.
The number of shares on which commission is
payable should be disclosed in the prospectus or
statement in lieu of prospectus.
Thank you
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Reduction of capital under section 96.
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Reduction of capital and objecting Creditors
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Liability of members in respect of reduced share.
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Prohibition on purchase of share.
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Purchase of its own shares by a listed company.