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What is a Right Issue?

 

Right issue is a mean for companies to raise funds by issuing new ordinary shares. Companies can issue other securities such as preferential shares, bonds and warrants instead of new ordinary shares. The company can ask the existing shareholders for capital for the following reasons:

• To fund acquisition or expansion plans.
• To repay maturing debts as an alternative. The company may be unable to secure more borrowings.

 

Existing shareholders are given the opportunity to maintain their stake in the company to prevent dilution. When there is a right issue and the existing shareholder chooses not to subscribe for the new shares, the shareholder's stake in the company is diluted, as the new shares are added to the total shares outstanding in the market.

 

 

As a remisier for many years, I realised that investors and traders who are starting out tend to ask a similar set of questions. The topic on deciphering corporate actions has popped up multiple times, and I have decided to compile the information to educate the folks out there. You're welcome.

 

 

What is Share Consolidation?

 

Share Consolidation is also known as "Reverse Stock Split". It is a corporate action to decrease the total number of outstanding shares and increase the nominal or par value of each share.

After the corporate action, the shareholder will own fewer but theoretically higher priced shares due to the decrease in the total outstanding shares in the market.

There will be no impact on the value of the shareholder's holdings relative to the total market valuation of the company.

What is a Bonus Share Issue?

 

A Bonus Share is also known as Scrip Issue or Capitalisation Issue. Existing shareholders of the company gets free additional shares at no cost in direct proportion to the existing shares that they hold. 

For example, if there is a Bonus Offer of 1 for 10, it means that the existing shareholders will receive 1 new share, for every 10 existing shares that they have.

Bonus Share issue will result in an increase of outstanding shares in the market. However, it does not cause any dilution in the shareholders' ownership in the company.

The bonus shares are accorded from the company's share price premium or retained earnings. Retained earnings are the net profits accumulated over the years and are not paid out in dividends to shareholders.

The conversion of retained earnings to paid-up share capital (Bonus Shares) is known as capitalisation of reserves. During the capitalisation of reserves, there will be corresponding increase in shareholders' equity and decrease in retained earnings.

 

*Important Note* No new funds are raised in this corporate action.
Shareholders are issued bonus shares for FREE.