Chapter 12 Bonus Issues and rights issues Flashcards
Bonus issues and rights issues
Bonus Issues – a bonus issue of shares is a free issue of shares. Bonus shares are issued to shareholders in proportion to their existing holdings. A company will announce a bonus issue in order to reduce the share price and to make the shares more marketable or more tradeable. After the bonus issue the shareholder has more shares but the total holding is still worth the same, the price of the share has just been reduced.
Bonus shares are treated as having been acquired at the same time as the original shares for CGT purposes.
Rights issues – this is where a shareholder will buy any new shares offered to him, there is therefore a cost to a rights issue. Like bonus shares, rights shares are issued in proportion to the existing holding. The shareholder can buy less than his rights entitlement or none at all if they wish. The main purpose of a rights issue is to enable the company to raise additional cash from its shareholders. The rights shares are usually offered at a price which is less than market value.
Like bonus shares, rights shares are treated as having been acquired at the same time as the original shares for CGT purposes. As there is a cost attaching to the rights shares, they are simply treated as a normal purchase of shares for CGT purposes.
