Basis of Distinction:
Governing Sections:
1. Rights Shares: u/s 62 of Companies Act of 2013
2. Bonus Shares: u/s 63 of Companies Act of 2013
Meaning:
1. Rights Shares: Issue of further shares to the already existing shareholders of the company in ratio of the proportion of their holdings at discounted price.
2. Bonus Shares: Basically issued free of cost on pro-rata basis to existing shareholders.
Reason for issuing:
1. Rights Shares: Basically with the intention of either reducing debt equity ratio of its company or/and to raise additional capital for further expansion of its business.
2. Bonus Shares: Since the bonus shares are issued out of profits or free reserves of the company, it is also known by capitalization of profits, and that’s why a company issues it thinking that it won’t be able to pay dividends despite having profits, and thereby increasing the amount of shareholding of a particular shareholder.
Cash Flow:
1. Rights Shares: There is adequate cash inflow when issuing it as shareholders need to pay money to company to purchase such shares.
2. Bonus Shares: No such cash inflow, and mere increase of quantity of shares as well as shareholding of shareholder happens.
Minimum Subscription:
1. Rights Shares: It is generally prescribed by the company, and needs to be complied with.
2. Bonus Shares: No such minimum subscription there
Authorization:
1. Rights Shares: Made on member’s authorization through ordinary or special resolution
2. Bonus Shares: Made on express recommendation from the Board of Members and need to be authorized by members in general meeting.
Market Value:
1. Rights Shares: Market value of the company increases as net assets stands increases.
2. Bonus Shares: It remains unaffected though.
Renunciation:
1. Rights Shares: As they are issued for raising additional capital and expansion purposes, it can be renounced either partially or wholly.
2. Bonus Shares: Unlike previously, here such option is not available as company gives bonus shares out of its own profits and accumulated reserves, and that’s why they are always fully paid up.
Basic Entries in Books of Accounts:
1. Rights Shares:
Bank A/c Dr.
To Share Capital A/c
To Securities Premium A/c (only if offered at premium)
(Being _ number of equity shares issued at_ Rs. Per share through Shareholders resolution No. _dated_)
2. Bonus Shares:
Securities Premium A/c Dr.
Capital Redemption Reserve A/c Dr.
Other Free Reserves A/c Dr.
To Bonus to Shareholders A/c
(Being issue of Bonus Shares done as per the ratio identified and finalized as per the Shareholders Resolution No. _dated_)
Bonus to Shareholders A/c Dr.
To Equity Share Capital A/c
(Being such balance transferred to equity share capital account)
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