08-18-2007, 07:27 PM
Dear,
All profits ultimately make part of "Revenue Reserves" which are normally free reserves unless these are not retained for any specific declared purpose. "Accumulated profit" or "Un-appropriated Profit" had been a part of the definition of "reserves" provided by the 4th Schedule to the Companies Ordinance 1984. Reserves also include some capital reserves which do not arise from the profit and loss account and are directly credited in the equity. Examples are share premium account (received on issuance of share capital sat more than the face value), fair value reserve (created by recognising gains on financial assets treated as "available for sale" financial assets) etc. Capital reserve and revenue reserve are different terms while free reserve and non-free reserves are different terms. A capital reserve can also be a free reserve e.g. share premium.
As far as bonus shares are concerned, basically these are issued for two reasons. Firstly, to enhance the share capital by capitalising the free reserves/accumulated profits without calling for a right issue. Secondly, to transfer some benefit from the reserves/profits to the shareholders for holding such shares as investment. Bonus shares are, therefore, aslo called as STOCK DIVIDEND i.e. dividend in shape of "common stock" i.e. ordinary shares.
As per above clarification, it is true that bonus shares can be issued for distributing profits among shareholders in the shape of common stock without the distibution of cash resources of the company.
Now coming to the Right Issue. Right issue, truly speaking, infact always carry a characteristic or element of bonus issue to some extent which is normally embedded in the fundamentals of such issue. However, right issue benefits the existing shareholders in the manner of foregoing some cash resource or addition to equity by the company, for the sake of the shareholders, that is expected to be received by the company. For example, is market value of share of a company is Rs 30 and the right is being given to existing shareholders at Rs 2 premium with face value of Rs 10, then it means company will recieve only Rs 12 against the issue of the right share whereas the market price of the share was Rs 30. This shows that there is an embedded bonus element (in value) of Rs.17 per share on each of the right share issued. However, this is not an outflow of economic resources from the company and do not either represent the profits pay out or cash pay out straightforwardly. This is just the lesser reciept of share premium than what could be expected. Again it is expectation, as dilution of EPS on share issue will also affect the share's market price and PE ratio after its issuance unless resources are so efficiently utilized that proft earnings match the increase in shares. This is a lengthy discussion. I can only say that Right share issuance does not straightforwardly result in pay out of profits of the company.
However, bonus share issuance is the pau out to shareholders of accumulated profits or reserves.
Hope ur query has been resolved.
Best regards,
Kamran.
All profits ultimately make part of "Revenue Reserves" which are normally free reserves unless these are not retained for any specific declared purpose. "Accumulated profit" or "Un-appropriated Profit" had been a part of the definition of "reserves" provided by the 4th Schedule to the Companies Ordinance 1984. Reserves also include some capital reserves which do not arise from the profit and loss account and are directly credited in the equity. Examples are share premium account (received on issuance of share capital sat more than the face value), fair value reserve (created by recognising gains on financial assets treated as "available for sale" financial assets) etc. Capital reserve and revenue reserve are different terms while free reserve and non-free reserves are different terms. A capital reserve can also be a free reserve e.g. share premium.
As far as bonus shares are concerned, basically these are issued for two reasons. Firstly, to enhance the share capital by capitalising the free reserves/accumulated profits without calling for a right issue. Secondly, to transfer some benefit from the reserves/profits to the shareholders for holding such shares as investment. Bonus shares are, therefore, aslo called as STOCK DIVIDEND i.e. dividend in shape of "common stock" i.e. ordinary shares.
As per above clarification, it is true that bonus shares can be issued for distributing profits among shareholders in the shape of common stock without the distibution of cash resources of the company.
Now coming to the Right Issue. Right issue, truly speaking, infact always carry a characteristic or element of bonus issue to some extent which is normally embedded in the fundamentals of such issue. However, right issue benefits the existing shareholders in the manner of foregoing some cash resource or addition to equity by the company, for the sake of the shareholders, that is expected to be received by the company. For example, is market value of share of a company is Rs 30 and the right is being given to existing shareholders at Rs 2 premium with face value of Rs 10, then it means company will recieve only Rs 12 against the issue of the right share whereas the market price of the share was Rs 30. This shows that there is an embedded bonus element (in value) of Rs.17 per share on each of the right share issued. However, this is not an outflow of economic resources from the company and do not either represent the profits pay out or cash pay out straightforwardly. This is just the lesser reciept of share premium than what could be expected. Again it is expectation, as dilution of EPS on share issue will also affect the share's market price and PE ratio after its issuance unless resources are so efficiently utilized that proft earnings match the increase in shares. This is a lengthy discussion. I can only say that Right share issuance does not straightforwardly result in pay out of profits of the company.
However, bonus share issuance is the pau out to shareholders of accumulated profits or reserves.
Hope ur query has been resolved.
Best regards,
Kamran.
