CHAPTER 6

ACCOUNTING FOR BONUS

ISSUE AND RIGHT ISSUE
LEARNING OUTCOMES

After studying this chapter, you will be able to:

 Understand the provisions relating to issue of bonus shares and
right shares.
 Account for bonus shares and right issue in the books of issuing
company.
 Understand the meaning of renunciation of right.
 Differentiate between Cum-right and Ex-right valuation of share.
 Calculate value of rights.

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 6.2 ACCOUNTING

CHAPTER OVERVIEW

BONUS Bonus issue means a issue of free additional shares to existing

SHARES shareholders.
A company may issue fully paid-up bonus shares to its share-
holders out of—
(i) its free reserves;
(ii) securities premium account; or
(iii) capital redemption reserve account:
Bonus shares should not be issued out of revaluation reserves
(i.e., reserves created by the revaluation of assets).
RIGHT ISSUE Rights issue is an issue of rights to a company's existing share-
holders that entitles them to buy additional shares directly from
the company in proportion to their existing holdings, within a
fixed time period. In a rights offering, the subscription price at
which each share may be purchased is generally at a discount to
the current market price. Rights are often transferable, allowing
the holder to sell them in the open market.
The difference between the cum-right and ex-right value of the
share is the value of the right.

1. ISSUE OF BONUS SHARES

1.1 INTRODUCTION
A bonus share may be defined as issue of shares at no cost to current shareholders
in a company, based upon the number of shares that the shareholder already owns.
In other words, no new funds are raised with a bonus issue While the issue of bonus
shares increases the total number of shares issued and owned, it does not increase the
net worth of the company. Although the total number of issued shares increases, the
ratio of number of shares held by each shareholder remains constant.
Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of profits refers
to the process of converting profits or reserves into paid up capital. A company may
capitalise its profits or reserves which otherwise are available for distribution as
dividends among the members by issuing fully paid bonus shares to the members.
If the subscribed and paid-up capital exceeds the authorised share capital as a result of
bonus issue, a resolution shall be passed by the company at its general body meeting
for increasing the authorised capital. A return of bonus issue along with a copy of
resolution authorising the issue of bonus shares is also required to be filed with the
Registrar of Companies.
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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.3

1.2 PROVISIONS OF THE COMPANIES ACT, 2013

Section 63 of the Companies Act, 2013 deals with the issue of bonus shares. According
to Sub-section (1) of Section 63, a company may issue fully paid-up bonus shares to its
members, in any manner whatsoever, out of—
(i) its free reserves*;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves created
by the revaluation of assets.
ub-section (2) of Section 63 provides that no company shall capitalise its profits or
S
reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1),
unless—
(a) it is authorised by its articles;
(b) it has, on the recommendation of the Board, been authorised in the general
meeting of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are made
fully paid-up.
The company which has once announced the decision of its Board recommending a
bonus issue, shall not subsequently withdraw the same.
Sub-section (3) of the Section also provides that the bonus shares shall not be issued
in lieu of dividend.
As per Para 39 (i) of Table F under Schedule I to the Companies Act, 2013, a company
in general meeting may, upon the recommendation of the Board, resolve—

*As per Section 2(43) of the Companies Act, 2013, “free reserves” means such reserves which, as per the
latest audited balance sheet of a company, are available for distribution as dividend. Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a
reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in
profit and loss account on measurement of the asset or the liability at fair value,
shall not be treated as free reserves.

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 6.4 ACCOUNTING

(i) (a) that it is desirable to capitalise any part of the amount for the time being standing
to the credit of any of the company’s reserve accounts, or to the credit of the profit
and loss account, or otherwise available for distribution; and (b) that such sum be
accordingly set free for distribution in the specified manner amongst the members
who would have been entitled thereto, if distributed by way of dividend and in the
same proportions.
(ii) The sum aforesaid shall not be paid in cash but shall be applied, subject to the
provision contained in clause (iii), either in or towards— (a) paying up any amounts for
the time being unpaid on any shares held by such members respectively; (b) paying up
in full, unissued shares of the company to be allotted and distributed, credited as fully
paid-up, to and amongst such members in the proportions aforesaid; partly in the way
specified in (a) and partly in that specified in (b) above;
A securities premium account and a capital redemption reserve account may be applied
in the paying up of unissued shares to be issued to members of the company as fully
paid bonus shares. In other words, securities premium account and capital redemption
reserve cannot be applied towards payment of unpaid amount on any shares held by
existing shareholders.
As per Section 63(2) of the Companies Act, 2013, bonus shares cannot be issued
unless party paid-up shares are made fully paid-up. Para 39(ii) of Table F under
Schedule I to the Companies Act, 2013 allows use of free reserves for paying up
amounts unpaid on shares held by existing shareholders.
On a combined reading of both the provisions, it can be said that free reserves may be
used for paying up amounts unpaid on shares held by existing shareholders (though
securities premium account and capital redemption reserve cannot be used).

1.3 SEBI REGULATIONS

A listed company, while issuing bonus shares to its members, has to comply with the
following requirements under the SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009:

Regulation 92- Conditions for Bonus Issue

Subject to the provisions of the Companies Act, 2013 or any other applicable law for
the time being in force, a listed company may issue bonus shares to its members if:
(a) it is authorised by its articles of association for issue of bonus shares, capitalisation
of reserves, etc.:
Provided that if there is no such provision in the articles of association, the
issuer shall pass are solution at its general body meeting making provisions in
the articles of associations for capitalisation of reserve;

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.5

(b) it has not defaulted in payment of interest or principal in respect of fixed

deposits or debt securities issued by it;
(c) it has sufficient reason to believe that it has not defaulted in respect of the
payment of statutory dues of the employees such as contribution to provident
fund, gratuity and bonus;
(d) the partly paid shares, if any outstanding on the date of allotment, are made
fully paid up
Regulation 93- Restriction on bonus issue
No issuer shall make a bonus issue of equity shares unless it has made reservation of
equity shares of the same class in favour of the holders of outstanding compulsorily
convertible debt instruments, if any, in proportion to the convertible part thereof. The
equity shares so reserved for the holders of fully or partly compulsorily convertible
debt instruments shall be issued at the time of conversion of such convertible debt
instruments on the same terms or same proportion at which the bonus shares were
issued.
Regulation 94- Bonus shares only against reserves, etc. if capitalised in cash
The bonus issue shall be made out of free reserves built out of the genuine profits or
securities premium collected in cash only and reserves created by revaluation of fixed
assets shall not be capitalised for the purpose of issuing bonus shares. The bonus share
shall not be issued in lieu of dividend.
Regulation 95- Completion of bonus issue
An issuer, announcing a bonus issue after the approval of its board of directors and
not requiring shareholders’ approval for capitalisation of profits or reserves for making
the bonus issue, shall implement the bonus issue within fifteen days from the date of
approval of the issue by its board of directors: Provided that where the issuer is required
to seek shareholders’ approval for capitalisation of profits or reserves for making the
bonus issue, the bonus issue shall be implemented within two months from the date
of the meeting of its board of directors wherein the decision to announce the bonus
issue was taken subject to shareholders’ approval.
Once the decision to make a bonus issue is announced, the issue cannot be withdrawn.

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 6.6 ACCOUNTING

1.4 JOURNAL ENTRIES

(A) (1) Upon the sanction of an issue of bonus shares
(a) Debit Capital Redemption Reserve Account
Debit Securities Premium Account1
Debit General Reserve Account

Debit Profit & Loss Account

(b) Credit Bonus to Shareholders Account.
(2) Upon issue of bonus shares
(a) Debit Bonus to Shareholders Account
(b) Credit Share Capital Account.
(B) (1) Upon the sanction of bonus by converting partly paid shares into fully
paid shares
(a) Debit General Reserve Account
Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account
(2) On making the final call due
(a) Debit Share Final Call Account
(b) Credit Share Capital Account.
(3) On adjustment of final call
(a) Debit Bonus to Shareholders Account
(b) Credit Share Final Call Account
Illustration 1
Following items appear in the trial balance of Bharat Ltd. (a listed company) as on 31st
March, 20X1:
`
40,000 Equity shares of ` 10 each 4,00,000
Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
General Reserve 1,05,000
Surplus i.e. credit balance of Profit and Loss Account 50,000

1As per SEBI Regulations, such securities premium should be realised in cash, whereas under the Companies Act,
2013, there is no such requirement. In accordance with Section 52, securities premium may arise on account of issue
of shares other than by way of cash. Thus, for unlisted companies, securities premium (not realised in cash) may be
used for issue of bonus shares, whereas the same cannot be used in case of listed companies.

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.7

The company decided to issue to equity shareholders bonus shares at the rate of 1 share
for every 4 shares held and for this purpose, it decided that there should be the minimum
reduction in free reserves. Pass necessary journal entries.
Solution
Journal Entries in the books of Bharat Ltd.
Dr. Cr.
` `
Capital Redemption Reserve A/c Dr. 55,000
Securities Premium A/c Dr. 30,000
General Reserve A/c (b.f.) Dr. 15,000
To Bonus to Shareholders A/c 1,00,000
(Bonus issue of one share for every four shares held, by
utilising various reserves as per Board’s resolution dated…….)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital A/c 1,00,000
(Capitalisation of profit)

Illustration 2
Following is the extract of the Balance Sheet of Solid Ltd. as at 31st March, 20X1:
`
Authorised capital :
10,000 12% Preference shares of ` 10 each 1,00,000
1,00,000 Equity shares of ` 10 each 10,00,000
11,00,000
Issued and Subscribed capital:
8,000 12% Preference shares of ` 10 each fully paid 80,000
90,000 Equity shares of ` 10 each, ` 8 paid up 7,20,000
Reserves and Surplus :
General reserve 1,60,000
Revaluation reserve 35,000
Securities premium(collected in cash) 20,000
Profit and Loss Account 2,05,000
Secured Loan:
12% Debentures @ ` 100 each 5,00,000

On 1st April, 20X1 the Company has made final call @ ` 2 each on 90,000 equity shares.
The call money was received by 20th April, 20X1. Thereafter the company decided to
capitalise its reserves by way of bonus at the rate of one share for every four shares

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 6.8 ACCOUNTING

held. Show necessary entries in the books of the company and prepare the extract of
the Balance Sheet immediately after bonus issue assuming that the company has passed
necessary resolution at its general body meeting for increasing the authorised capital.
Solution
Solid Ltd.
Journal Entries
Dr. Cr.
20X1 ` `
April 1 Equity Share Final Call A/c Dr. 1,80,000
To Equity Share Capital A/c 1,80,000
(Final call of ` 2 per share on 90,000 equity shares
due as per Board’s Resolution dated....)
April 20 Bank A/c Dr. 1,80,000
To Equity Share Final Call A/c 1,80,000
(Final Call money on 90,000 equity shares received)
Securities Premium A/c Dr. 20,000
General Reserve A/c Dr. 1,60,000
Profit and Loss A/c (b.f.) Dr. 45,000
To Bonus to Shareholders A/c 2,25,000
(Bonus issue @ one share for every four shares
held by utilising various reserves as per Board’s
Resolution dated...)
April 20 Bonus to Shareholders A/c Dr. 2,25,000
To Equity Share Capital A/c 2,25,000
(Capitalisation of profit)

Balance Sheet (Extract) as on 30th April, 20X1 (after bonus issue)

Particulars Notes Amount (`)
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 12,05,000
b Reserves and Surplus 2 1,95,000
2 Non-current liabilities
a Long-term borrowings 3 5,00,000
Total 19,00,000

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.9

Notes to Accounts

1 Share Capital
Equity share capital
Authorised share capital
1,25,000 Equity shares of ` 10 each (refer working note below) 12,50,000
Issued, subscribed and fully paid share capital
1,12,500 Equity shares of ` 10 each, fully paid
(Out of above, 22,500 equity shares @ ` 10 each were issued
by way of bonus) (A) 11,25,000
Preference share capital
Authorised share capital
10,000 12% Preference shares of ` 10 each 1,00,000
Issued, subscribed and fully paid share capital
8,000 12% Preference shares of ` 10 each (B) 80,000
Total (A + B) 12,05,000
2 Reserves and Surplus
Revaluation Reserve 35,000
Securities Premium 20,000
Less: Utilised for bonus issue (20,000) Nil
General reserve 1,60,000
Less: Utilised for bonus issue (1,60,000) Nil
Profit & Loss Account 2,05,000
Less: Utilised for bonus issue (45,000) 1,60,000
Total 1,95,000
3 Long-term borrowings
Secured
12% Debentures @ ` 100 each 5,00,000

Working Note :
The authorised capital should be increased as per details given below : `
Existing authorised Equity share capital 10,00,000
Add : Issue of bonus shares to equity shareholders
(25% of ` 10,00,000) 2,50,000
12,50,000

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 6.10 ACCOUNTING

Illustration 3
Following is the extract of the Balance Sheet of Preet Ltd. as at 31st March, 20X1

Authorised capital : `
15,000 12% Preference shares of ` 10 each 1,50,000
1,50,000 Equity shares of ` 10 each 15,00,000
16,50,000
Issued and Subscribed capital:
12,000 12% Preference shares of ` 10 each fully paid 1,20,000
1,35,000 Equity shares of ` 10 each, ` 8 paid up 10,80,000
Reserves and surplus:
General Reserve 1,80,000
Capital Redemption Reserve 60,000
Securities premium (collected in cash) 37,500
Profit and Loss Account 3,00,000

On 1st April, 20X1, the Company has made final call @ ` 2 each on 1,35,000 equity
shares. The call money was received by 20th April, 20X1. Thereafter, the company decided
to capitalise its reserves by way of bonus at the rate of one share for every four shares
held.
Show necessary journal entries in the books of the company and prepare the extract of
the balance sheet as on 30th April, 20X1 after bonus issue.
Answer
Journal Entries in the books of Preet Ltd.
` `
1-4-20X1 Equity share final call A/c Dr. 2,70,000
To Equity share capital A/c 2,70,000
(For final calls of ` 2 per share on 1,35,000 equity
shares due as per Board’s Resolution dated….)
20-4-20X1 Bank A/c Dr. 2,70,000
To Equity share final call A/c 2,70,000
(For final call money on 1,35,000 equity shares
received)
Securities Premium A/c Dr. 37,500
Capital Redemption Reserve A/c Dr. 60,000
General Reserve A/c Dr. 1,80,000
Profit and Loss A/c Dr. 60,000
To Bonus to shareholders A/c 3,37,500

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.11

(For making provision for bonus issue of one

share for every four shares held)
Bonus to shareholders A/c Dr. 3,37,500
To Equity share capital A/c 3,37,500
(For issue of bonus shares)

Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)

`
Authorised Capital
15,000 12% Preference shares of `10 each 1,50,000
1,83,750 Equity shares of `10 each (refer working note below) 18,37,500
Issued and subscribed capital
12,000 12% Preference shares of `10 each, fully paid 1,20,000
1,68,750 Equity shares of `10 each, fully paid 16,87,500
(Out of above, 33,750 equity shares @ `10 each were issued by way of bonus)
Reserves and surplus
Profit and Loss Account 2,40,000

Working Note :
The authorised capital should be increased as per details given below: `
Existing authorised Equity share capital 15,00,000
Add : Issue of bonus shares to equity shareholders 3,37,500
18,37,500

2. RIGHT ISSUE
2.1 INTRODUCTION
Provisions of section 62(1) (a) govern any company, public or private, desirous of raising
its subscribed share capital by issue of further shares. Whenever a company intends
to issue new shares, the voting and governance rights of the existing shareholders
may be diluted, if they are not allowed to preserve them. It may happen because new
shareholders may subscribe to the issued share capital. Companies Act, 2013 allows
existing shareholders to preserve their position by offering those newly issued shares
at the first instance to them. The existing shareholders are given a right to subscribe
these shares, if they like. However, if they do not desire to subscribe these shares, they
are even given the right to renounce it in favour of someone else (unless the articles of
the company prohibits such a right to renounce).
In nutshell, the existing shareholders have a right to subscribe to any fresh issue of
shares by the company in proportion to their existing holding for shares. They have an
implicit right to renounce this right in favour of anyone else, or even reject it completely.

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In other words, the existing shareholders have right of first refusal, i.e., the existing
shareholders enjoy a right to either sub-scribe for these shares or sell their rights or
reject the offer.

Example
Assume a company makes a right issue of 10,000 shares when its existing issued and subscribed
capital is 100,000 shares. This enables any shareholder having 10 shares to subscribe to 1 new
share. Hence X, an existing shareholder holding 1,000 shares, may subscribe to 100 shares as
a matter of right. The existing share percentage of X was 1% (1,000 / 100,000). If X subscribes
these shares, his percentage holding in the company will be maintained (1,100 / 110,000).
However, if X does not mind his share % diluting (1,000 / 110,000), he may renounce the right
in favour of any one else, say Y. Hence, these 100 shares will be issued to Y, at the insistence
of X. X may charge Y for this privilege, which is technically termed as the value of right.
A company desirous of issuing new shares has to offer, as per Section 62(1) (a) of
Companies Act 2013, the shares to existing equity shareholders through a letter of
offer subject to the following conditions, namely:
 The offer shall be made by notice specifying the number of shares offered and
limiting a time not being less than fifteen days and not exceeding thirty days from
the date of the offer within which the offer, if not accepted, shall be deemed to
have been declined;
 Unless the articles of the company otherwise provide, the offer aforesaid shall be
deemed to include a right exercisable by the person concerned to renounce the
shares offered to him or any of them in favour of any other person; and the notice
(referred to in above bullet point) shall contain a statement of this right;
 After the expiry of the time specified in the notice aforesaid, or on receipt of
earlier intimation from the person to whom such notice is given that he declines
to accept the shares offered, the Board of Directors may dispose of them in such
manner which is not disadvantageous to the shareholders and the company

Exceptions to the rights of existing equity shareholders

Section 62 recognises four situations under which the further shares are to be issued
by a company, but they need not be offered to the existing shareholders.
The shares can be offered, without being offered to the existing shareholders, provided
the company has passed a special resolution and shares are offered to
Situation 1
To employees under a scheme of employees’ stock option subject to certain specified
conditions

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.13

Situation 2
To any persons, either for cash or for a consideration other than cash, if the price of
such shares is determined by the valuation report of a registered valuer subject to
certain specified conditions.
Situation 3
Sometimes companies borrow money through debentures / loans and give their
creditor an option to buy equity shares of a company. An option is a right, but not
an obligation, to buy equity shares on a future date (expiry date) at a price agreed in
advance (exercise price).
According to Section 62(3), nothing in this section shall apply to the increase of the
subscribed capital of a company caused by the exercise of an option as a term attached
to the debentures issued or loan raised by the company to convert such debentures or
loans into shares in the company.
Provided that the terms of issue of such debentures or loan containing such an option
have been approved before the issue of such debentures or the raising of loan by a
special resolution passed by the company in general meeting.
Situation 4
It is a special situation where the loan has been obtained from the government, and
government in public interest, directs the debentures / loan to be converted into equity
shares.
According to Section 62(4), notwithstanding anything contained in sub-section
(3), where any debentures have been issued, or loan has been obtained from any
Government by a company, and if that Government considers it necessary in the public
interest so to do, it may, by order, direct that such debentures or loans or any part
thereof shall be converted into shares in the company on such terms and conditions
as appear to the Government to be reasonable in the circumstances of the case even
if terms of the issue of such debentures or the raising of such loans do not include a
term for providing for an option for such conversion.
Provided that where the terms and conditions of such conversion are not acceptable to
the company, it may, within sixty days from the date of communication of such order,
appeal to the Tribunal which shall after hearing the company and the Government pass
such order as it deems fit.
In determining the terms and conditions of conversion under sub-section (4), the
Government shall have due regard to the financial position of the company, the terms
of issue of debentures or loans, as the case may be, the rate of interest payable on such
debentures or loans and such other matters as it may consider necessary.

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Where the Government has, by an order made under sub-section (4), directed that
any debenture or loan or any part thereof shall be converted into shares in a company
and where no appeal has been preferred to the Tribunal or where such appeal has
been dismissed, the memorandum of such company shall, where such order has the
effect of increasing the authorised share capital of the company, stand altered and the
authorised share capital of such company shall stand increased by an amount equal to
the amount of the value of shares which such debentures or loans or part thereof has
been converted into.
Financial effects of a further issue
The financial position of a business is contained in the balance sheet. Further issue of
shares increase the amount of equity (net worth2) as well as the liquid resources (Bank).
The amount of equity is the product of further number of shares issued multiplied by
issue price. The issue price may be higher than the face value (issue at a premium).
Companies Act does not allow issue of shares at a discount, except issue of sweat
equity shares under Section 53.

Book Value of a share

Book value of a share = Net worth (as per books)/ Number of shares
if there are 10,000 shares with book value 1,25,000. The book value of one share is
(` 125,000/10,000 shares) ` 12.50 per share. However, the market value may differ
from the book value of shares. The market value of a company's shares represents the
present value of future cash flows expected to be earned from the share in the form of
dividends and capital gains from expected future share price appreciation.
The market price, which exists before the rights issue, is termed as Cum-right Market
Price of the share. If the company decides to issue further shares, it may affect the
market value of the share. 'Theoretically', the value of a company's shares after a rights
issue must equal the sum of market capitalisation immediate prior to rights issue and
the cash inflows generated from the rights issue.
Normally, the further public issue to the existing shareholders are offered at a
discounted price from the market value, to evoke positive response as well as to reward
the existing shareholders.
Assume 1,000 shares are issued (making it a right issue of 1:10; or 1 new share for 10
existing shares held) at a price of ` 14 per share. The existing worth of tangible assets
held by the business shall become 264,000 (Existing net worth ` 250,000 + Fresh Issue
` 14,000). Equity shares shall correspondingly command a valuation of ` 264,000.
2As per Section 2(57) of Companies Act 2013, “net worth” means the aggregate value of the paid-up share capital and
all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accu-
mulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet,
but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.15

The market price of the shares after further issue of shares (right issue) is termed as Ex-
right Market Price of the shares. Theoretical Ex-Rights Price is a deemed value, which
is attributed to a company's share immediately after a rights issue transaction occurs.
This price is going to prevail after the further issue of shares is executed.
Example :
Mr. Narain has 100 shares of Prosperous Company before rights issue.
Current worth of holding = No. of shares X Cum-right Market Price
= 100 X25
= ` 2,500
(a) If Narain exercises his right, he will pay ` 14X10 shares = ` 140.
His total investment in the company including right is ` 2,640 (` 2,500+` 140).
On a per share basis, it is ` 2,640 /110 shares = ` 24, which is the Ex-right Market
value of the share.
(b) If Narain does not exercises his right to further issue, his holding’s worth will
decline to ` 24 X 100 shares = ` 2400. The law allows him to compensate for this
dilution of shareholding by renouncing this right in favour of , say, Mr. Murthy.
Narain can charge Murthy, in well functioning capital markets, this dilution of
` 100 by renouncing his right to acquire 10 shares. Hence Murthy will be charged
` 10 per share (` 100 / 10 shares), in return for a confirmed allotment of 10 shares
at ` 14 each.
For every share to be offered to Murthy, Narain must have ten shares at the back.
Hence his holding of 10 shares fetches him right money of ` 10 or ` 1 per share held.
This is exactly equal to the difference between Cum-right and Ex-right value of the
share. It is termed as the Value of Right.
In a well-functioning capital market, this mechanism works in a fair manner to all the
participants.
 Murthy’s total investment will be ` 140 (payable to Company) + ` 100 (payable to
Narain, by way of value of right), or ` 240. He will end up holding ten shares at an
average cost of ` 24, which is the Ex-right Market Price of the share.
 Narain will have a final holding of ten shares worth ` 2400 + ` 100 by way of value
of right received from Murthy. It matches with his cum-right holding valuation.

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Right of Renunciation
Right of renunciation refers to the right of the shareholder to surrender his right to
buy the securities and transfer such right to any other person. Shareholders that have
received right shares have three choices of what to do with the rights. They can act on
the rights and buy more shares as per the particulars of the rights issue; they can sell
them in the market; or they can pass on taking advantage of their rights (i.e., reject the
right offer).
The renunciation of the right is valuable and can be monetised by the existing
shareholders in well-functioning capital market. The monetised value available to the
existing shareholders due to right issue is known as ‘value of right’. If a shareholder
decides to renounce all or any of the right shares in favour of his nominee, the value
of right is restricted to the sale price of the re-nouncement of a right in favour of the
nominee. In case the right issue offer is availed by an existing shareholder, the value of
right is determined as given below:
Value of right = Cum-right value of share – Ex-right value of share
Ex-right value of the shares = [Cum-right value of the existing shares + (Rights shares
X Issue Price)] / (Existing Number of shares + Number of right shares)
In our previous example, Ex-right value of share = [`250,000 + (` 14 X 1,000 shares)] /
10,000 + 1,000 shares = ` 24
Value of right = ` 25 – ` 24 = ` 1 per share.
The Ex-right value of the share is also known as the average price.
Illustration 4
A company offers new shares of ` 100 each at 25% premium to existing shareholders
on one for four bases. The cum-right market price of a share is ` 150. Calculate the
value of a right. What should be the ex-right market price of a share?
Solution :
Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares
Issue Price) / (Existing Number of shares + Rights Number of shares)
= (` 150 X 4 Shares + ` 125 X 1 Share) / (4 + 1) Shares
= ` 725 / 5 shares = ` 145 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= ` 150 – ` 145 = ` 5 per share.
Hence, any one desirous of having a confirmed allotment of one share from the
company at ` 125 will have to pay ` 20 (4 shares X ` 5) to an existing shareholder
holding 4 shares and willing to renounce his right of buying one share in favour of that
person.
© The Institute of Chartered Accountants of India
 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.17

2.2 ACCOUNTING FOR RIGHT ISSUE

The accounting treatment of rights share is the same as that of issue of ordinary shares
and the following journal entry will be made:
Bank A/c Dr.
To Equity shares capital A/c
In case rights shares are being offered at a premium, the premium amount is credited
to the securities premium account.
The accounting entry is usual and is
Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
Example :
A company having 100,000 shares of ` 10 each as its issued share capital, and having
a market value of ` 46, issues rights shares in the ratio of 1:10 at an issue price of ` 31.
The entry at the time of subscription of right shares by the existing shareholders will be

Bank A/c Dr. 3,10,000

To Equity Share Capital A/c 100,000
To Securities Premium A/c 210,000

2.3 ADVANTAGES AND DISADVANTAGES

OF RIGHT ISSUE
Advantages of right Issue
1. Right issue enables the existing shareholders to maintain their proportional
holding in the company and retain their financial and governance rights. It works
as a deterrent to the management, which may like to issue shares to known
persons with a view to have a better control over the company’s affairs.
2. In well functioning capital market3s, the right issue necessarily leads to dilution
in the value of share. However, the existing shareholders are not affected by it
because getting new shares at a discounted value from their cum-right value will
compensate decrease in the value of shares. The cum-right value is maintained
otherwise also, if the existing shareholders renounce their right in favour of a
third party.

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 6.18 ACCOUNTING

3. Right issue is a natural hedge against the issue expenses normally incurred by
the company in relation to public issue.
4. Right issue has an image enhancement effect, as public and shareholders view it
positively.
5. The chance of success of a right issue is better than that of a general public issue
and is logistically much easier to handle.
Disadvantages of right issue
1. The right issue invariably leads to dilution in the market value of the share of the
company.
2. The attractive price of the right issue should be objectively assessed against its
true worth to ensure that you get a bargained deal.

SUMMARY

 Bonus issue means issue of free additional shares to existing shareholders.

 Bonus Issue is also known as a "scrip issue" or "capitalisation issue" or
“capitalisation of profits”.
 Bonus issue has following major effects :
 Share capital gets increased according to the bonus issue ratio
 Effective Earnings per share, Book Value and other per share values stand
reduced.
 Markets take the action usually as a favourable act.
 Market price gets adjusted on issue of bonus shares.
 Accumulated profits get reduced.
 Bonus shares can be issued from following :
 Free Reserves
 Securities Premium
 Capital Redemption Reserve.
 A right issue is an offer of equity shares in a further issue of shares by a company
to its existing shareholders, to enable them in maintaining their financial and
governance interest in the company, if they so desire.

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.19

 The Right shares are normally offered at a price less than the cum-right value of
the share, causing dilution in its value post-right issue. The value of share after
right is termed as ex-right value (or average price) of the share. The difference
between the cum-right and ex-right value (average price) of the share is called
value of right.
 The accounting treatment of rights share is the same as that of issue of ordinary
shares.
 The right issue offers considerable advantages to existing shareholders enabling
them to maintain their rights in the company and is equally advantageous to the
company for its relatively simple logistics and cost effectiveness as compared
to a full blown pubic issue. However, the dilution in the value of the share is a
dampener and a major limitation.

TEST YOUR KNOWLEDGE

MCQs

1. Which of the following cannot be used for issue of bonus shares as per the
Companies Act?
(a) Securities premium account
(b) Revaluation reserve
(c) Capital redemption reserve
2. Which of the following statements is true with regard to declaring and issuing of
Bonus Shares?
(a) Assets are transferred from the company to the share holders.
(b) A Bonus issue results in decrease in reserves and surplus.
(c) A Bonus issue is same as declaration of dividends.

3. Which of the following statement is true in case of bonus issue?

(a) Convertible debenture holders will get bonus shares in same proportion as
to the existing shareholders.
(b) Bonus shares may be issued to convertible debenture holders at the time of
conversion of such debentures into shares.
(c) Both (a) and (b).

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 6.20 ACCOUNTING

4. Bonus issue is also known as

(a) Scrip issue.
(b) Capitalisation issue.
(c) Both (a) and (b).
5. The bonus issue is not made unless
(a) Partly paid shares are made fully paid up.
(b) It is provided in its articles of association
(c) Both (a) and (b).
6. In case of further issue of shares, the right to renounce the shares in favour of a
third party
(a) Must include a right exercisable by the person concerned to renounce the
shares;
(b) Should include a right exercisable by the person concerned to renounce the
shares;
(c) Is deemed to include a right exercisable by the person concerned to renounce
the shares (subject to the provisions under the articles of the company).
7. A company’s share’s face value is ` 10, book value is ` 20, Right issue price is ` 30
and Market price is ` 40, while recording the issue of right share, the securities
premium will be credited with
(a) ` 10
(b) ` 20
(c) ` 30
8. A. Right shares enables existing shareholders to maintain their proportional
holding in the company.
B. Right share issue does not cause dilution in the market value of the share.
Which of the option is correct:
(a) A-Correct; B Correct
(b) A – Incorrect; B Correct
(c) A Correct; B – Incorrect
Theoretical Questions
1. What is meant by Bonus issue? Explain its related provisions as per the Companies
Act, 2013.
2. Explain the financial effects of a further issue of equity shares on the market value
of the share.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.21

3. What are the advantages and disadvantages of a rights issue?

Practical Questions
Question 1
Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 20X1:
Particulars Amount
4,500 Equity Shares of ` 100 each 4,50,000
Securities Premium(collected in cash) 40,000
Capital Redemption Reserve 70,000
General Reserve 1,05,000
Profit and Loss Account (Cr. Balance) 65,000

The company decided to issue to equity shareholders bonus shares at the rate of 1
share for every 3 shares held. Company decided that there should be the minimum
reduction in free reserves. Pass necessary Journal Entries in the books Saral Ltd.
Question 2
The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 20X1:
Notes ` in Lakhs
(1) Share Capital
Authorised :
20 crore shares of ` 10 each 20,000
Issued and Subscribed :
10 crore Equity Shares of ` 10 each 10,000
2 crore 11% Cumulative Preference Shares of ` 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of ` 10 each, ` 8 per share called and paid up 8,000
2 crore 11% Cumulative Preference Shares of ` 10 each,
fully called and paid up 2,000
Total 10,000
(2) Reserves and Surplus :
Capital Redemption Reserve 1,485
Securities Premium(collected in cash) 2,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss Account 273
Total 4,798

© The Institute of Chartered Accountants of India

 6.22 ACCOUNTING

On 2nd April 20X1, the company made the final call on equity shares @ ` 2 per share.
The entire money was received in the month of April, 20X1.
On 1st June 20X1, the company decided to issue to equity shareholders bonus shares
at the rate of 2 shares for every 5 shares held. Pass journal entries for all the above
mentioned transactions. Also prepare the notes on Share Capital and Reserves and
Surplus relevant to the Balance Sheet of the company immediately after the issue of
bonus shares.
Question 3
Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1
Authorised capital: `
30,000 12% Preference shares of ` 10 each 3,00,000
3,00,000 Equity shares of ` 10 each 30,00,000
33,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and surplus :
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000

On 1st April, 20X1, the Company has made final call @ ` 2 each on 2,70,000 equity
shares. The call money was received by 20th April, 20X1. Thereafter, the company
decided to capitalise its reserves by way of bonus at the rate of one share for every
four shares held.
Show necessary journal entries in the books of the company and prepare the extract of
the balance sheet as on 30th April, 20X1 after bonus issue.
Question 4
A company has decided to increase its existing share capital by making rights issue to
its existing shareholders. The company is offering one new share for every two shares
held by the shareholder. The market value of the share is ` 240 and the company is
offering one share of ` 120 each. Calculate the value of a right. What should be the
ex-right market price of a share?

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.23

ANSWERS/ HINTS
MCQs
1. (b) 2. (b) 3. (c) 4. (c) 5. (c) 6. (c)
7. (b) 8. (c)
Theoretical Questions
Answer 1
Bonus Issue means an offer of free additional shares to existing shareholders. A
company may decide to distribute further shares as an alternative to increase the
dividend pay-out.
Refer para 1.2.
Answer 2
The financial position of a business is contained in the balance sheet. Further issue
of shares increase the amount of share capital as well as the liquid resources (Bank).
The amount of share capital issued is the product of further number of shares issued
multiplied by issue price. The issue price may be higher than the face value (issue at a
premium).
Answer 3
Rights issue is an issue of rights to a company's existing shareholders that entitles
them to buy additional shares directly from the company in proportion to their existing
holdings, within a fixed time period. For advantages and disadvantages of right issue,
refer para 2.2.

Practical Questions
Answer 1
Capital Redemption Reserve A/c Dr. 70,000
Securities Premium A/c Dr. 40,000
General Reserve A/c (b.f.) Dr. 40,000
To Bonus to Shareholders 1,50,000
(Being issue of bonus shares by utilisation of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 1,50,000
To Equity Share Capital 1,50,000
(Being capitalisation of Profit)

© The Institute of Chartered Accountants of India

 6.24 ACCOUNTING

Answer 2
Journal Entries in the books of Brite Ltd.
Dr. Cr.
20X1 ` in lakhs ` in lakhs
April 2 Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000
(Final call of ` 2 per share on 10 crore equity
shares made due)
Bank A/c Dr. 2,000
To Equity Share Final Call A/c 2,000
(Final call money on 10 crore equity shares
received)

June 1 Capital Redemption Reserve A/c Dr. 1,485

Securities Premium A/c Dr. 2,000
General Reserve A/c (b.f.) Dr. 515
To Bonus to Shareholders A/c 4,000
(Bonus issue of two shares for every five shares
held, by utilising various reserves as per Board’s
resolution dated…….)
Bonus to Shareholders A/c Dr. 4,000
To Equity Share Capital A/c 4,000
(Capitalisation of profit)

Notes to Accounts

` in lakhs
1. Share Capital
Authorised share capital
20 crore shares of ` 10 each 20,000
Issued, subscribed and fully paid up share capital
14 crore Equity shares of ` 10 each, fully paid up 14,000
(Out of the above, 4 crore equity shares @ ` 10 each were
issued by way of bonus)
2 crore, 11% Cumulative Preference share capital of ` 10 2,000
each, fully paid up
16,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.25

2. Reserves and Surplus

Capital Redemption reserve 1,485
Less: Utilised for bonus issue (1,485) -
Securities Premium 2,000
Less: Utilised for bonus issue (2,000) -
General Reserve 1,040
Less: Utilised for bonus issue (515) 525
Surplus (Profit and Loss Account) 273
Total 798

Answer 3
Journal Entries in the books of Manoj Ltd.
` `
1-4-20X1 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ` 2 per share on 2,70,000 equity
shares due as per Board’s Resolution dated….)
20-4- Bank A/c Dr. 5,40,000
20X1
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares
received)
Securities Premium A/c Dr. 75,000
Capital redemption Reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one share
for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)

© The Institute of Chartered Accountants of India

 6.26 ACCOUNTING

Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)

`
Authorised Capital
30,000 12% Preference shares of `10 each 3,00,000
3,67,500 Equity shares of `10 each (refer W.N.) 36,75,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of `10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ `10 each were issued by way of bonus
shares)
Reserves and surplus
Profit and Loss Account 4,80,000

Working Note :

The authorised capital should be increased as per details given below: `

Existing authorised Equity share capital 30,00,000
Add: Issue of bonus shares to equity shareholders 6,75,000
36,75,000
Answer 4
Ex-right value of the shares = (Cum-right value of the existing shares + Rights
shares x Issue Price)/(Existing Number of shares +
Rights Number of shares)
= (` 240 x 2 Shares + ` 120 x 1 Share) / (2 + 1) Shares
= ` 600 / 3 shares = ` 200 per share.
Value of right = Cum-right value of the share–Ex-right value of the share
= ` 240 – ` 200 = ` 40 per share.
Hence, any one desirous of having a confirmed allotment of one share from the
company at ` 120 will have to pay ` 80 (2 shares x ` 40) to an existing shareholder
holding 2 shares and willing to renounce his right of buying one share in favour of that
person.

© The Institute of Chartered Accountants of India