08-13-2007, 05:01 PM
Dear Bilal Azhar,
I referred you people to see rule 6 of Companies (Issue of Capital) Rules 1996. There might have been some problem for you guys in locating these rules. I hereunder narrate its contents which will more appropriately clarify your query
QUOTE
Rule 6 says
A listed company can issue bonus shares subject to the following conditions, namely-
(i) the decision of directors to issue bonus shares shall be communicated to the authority (SECP) and the respective stock exchange on the day of the decision and the intimation letter shall be accompanied by the auditors' certificate as specified in clause (iii) {below}.
(ii) the free reserves of the company calculated in the manner as specified in rule 5 (of above mentioned rules) shall be sufficient to issue bonus shares after retaining in the reserves 25% of the capital as it will be increased by the proposed bonus shares;
(iii) a certificate from the auditors shall be obtained to the effect that the free reserves and surpluses (i.e. accumulated profits) retained after the issue of bonus shares will not be less than 25% of the increased capital; and
(iv) all contingent liabilities disclosed in the audited accounts and any such liability which may have been created subsequent to the audited accounts shall be deducted while calculating minimum residual reserves of twenty five percent.
UNQUOTE
This shows that a listed company can only issue bonus shares if it is ensured that after issuing the bonus shares its FREE RESERVES will not be less than 25% of the total increased share capital amount after the proposed bonus issue. Free reserves have been defined in rule 5 as under
QUOTE
Free reserves include any amount which having been set aside out of revenue or other surpluses after adjustment of all intangible or fictitious assets, is free in that it is not retained to meet any diminution in value of assets, specific liability, contingency or commitment known to exist at the date of balance sheet, but does not include-
(i) reserve created as a result of revlauation of fixed assets;
(ii) good will reserve;
(iii) depreciation reserve to the extent of ordinary depreciation including allowances for extra shifts admissible under the provision of income tax ordinance; (i.e. accumulated depreciation appearing in accounts)
(iv) development allowance reserve created under the provisions of income tax ordinance;
(v) workers' welfare fund
(vi) provision for taxation to the extent of deferred or current liability of the company; and
(vii) capital redemption reserve.
UNQUOTE
To simplify the things you can understand that free reserves include the reserves which are not specifically created to meet any specific expenditure, loss or out flow of economic resources. Any reserve which would be general in its nature will be included in free reserves like share premium, general resreves, accumulated profits etc. However, law requires to deduct the value of intangible assets, contingent liabilities and comitments (disclosed in accounts) from the such reserves to calculate exact amount of free reserves.
Now coming to your query. If a company has accumulated losses and its current year's results are in profit, this would not be sufficient information to decide whether or not it can issue bonus shares. We will have to look on all of its free reserves before deciding its capability for issuing bonus shares. Some times due to certain appropriations, the accumulated profits are transferred to revenue reserves. In such case, if subsequently the company goes into losses, its accumulated profit can become negative and appear as accumulated loss but still it may has overall positive equity and positive frees resreves (in total) due to already appropriated and accumulated reserves under various headings even after adjusting for the negative balance of accumulated losses. In such cases, bonus shares can be issued by debiting other available free resreves and crediting bonus shares.
The matter is to judge the free reserves position and not merely the profitability. However, if in any case there is no other sufficient reserve and the profitability is also vanished and there appear accumulated losses, then of course the company can not issue bonus shares.
Hope you have recieved the required clarification.
Best regards,
KAMRAN.
I referred you people to see rule 6 of Companies (Issue of Capital) Rules 1996. There might have been some problem for you guys in locating these rules. I hereunder narrate its contents which will more appropriately clarify your query
QUOTE
Rule 6 says
A listed company can issue bonus shares subject to the following conditions, namely-
(i) the decision of directors to issue bonus shares shall be communicated to the authority (SECP) and the respective stock exchange on the day of the decision and the intimation letter shall be accompanied by the auditors' certificate as specified in clause (iii) {below}.
(ii) the free reserves of the company calculated in the manner as specified in rule 5 (of above mentioned rules) shall be sufficient to issue bonus shares after retaining in the reserves 25% of the capital as it will be increased by the proposed bonus shares;
(iii) a certificate from the auditors shall be obtained to the effect that the free reserves and surpluses (i.e. accumulated profits) retained after the issue of bonus shares will not be less than 25% of the increased capital; and
(iv) all contingent liabilities disclosed in the audited accounts and any such liability which may have been created subsequent to the audited accounts shall be deducted while calculating minimum residual reserves of twenty five percent.
UNQUOTE
This shows that a listed company can only issue bonus shares if it is ensured that after issuing the bonus shares its FREE RESERVES will not be less than 25% of the total increased share capital amount after the proposed bonus issue. Free reserves have been defined in rule 5 as under
QUOTE
Free reserves include any amount which having been set aside out of revenue or other surpluses after adjustment of all intangible or fictitious assets, is free in that it is not retained to meet any diminution in value of assets, specific liability, contingency or commitment known to exist at the date of balance sheet, but does not include-
(i) reserve created as a result of revlauation of fixed assets;
(ii) good will reserve;
(iii) depreciation reserve to the extent of ordinary depreciation including allowances for extra shifts admissible under the provision of income tax ordinance; (i.e. accumulated depreciation appearing in accounts)
(iv) development allowance reserve created under the provisions of income tax ordinance;
(v) workers' welfare fund
(vi) provision for taxation to the extent of deferred or current liability of the company; and
(vii) capital redemption reserve.
UNQUOTE
To simplify the things you can understand that free reserves include the reserves which are not specifically created to meet any specific expenditure, loss or out flow of economic resources. Any reserve which would be general in its nature will be included in free reserves like share premium, general resreves, accumulated profits etc. However, law requires to deduct the value of intangible assets, contingent liabilities and comitments (disclosed in accounts) from the such reserves to calculate exact amount of free reserves.
Now coming to your query. If a company has accumulated losses and its current year's results are in profit, this would not be sufficient information to decide whether or not it can issue bonus shares. We will have to look on all of its free reserves before deciding its capability for issuing bonus shares. Some times due to certain appropriations, the accumulated profits are transferred to revenue reserves. In such case, if subsequently the company goes into losses, its accumulated profit can become negative and appear as accumulated loss but still it may has overall positive equity and positive frees resreves (in total) due to already appropriated and accumulated reserves under various headings even after adjusting for the negative balance of accumulated losses. In such cases, bonus shares can be issued by debiting other available free resreves and crediting bonus shares.
The matter is to judge the free reserves position and not merely the profitability. However, if in any case there is no other sufficient reserve and the profitability is also vanished and there appear accumulated losses, then of course the company can not issue bonus shares.
Hope you have recieved the required clarification.
Best regards,
KAMRAN.
