Commercial Rationale And Direction
ur main types of share issue:
i Equity issue (or 'public issue'),
ii Bonus issue (or 'scrip issue'),
iii Capitalisation issue, and
iv Rights issue.
An equity issue is a sale of completely new shares, regardless of what shares may already have been issued and who holds them. Such an issue is made by an issuing house, often a merchant bank. The issue is usually underwritten which means that the underwriter agrees to buy any shares which remain unsold. Sales of such shares are made against a prospectus telling potential investors about the company. The prospectus must comply with strict rules laid down in law and by the Stock Exchange.
A bonus issue is where extra shares are given to existing shareholdings in proportion to their holdings. It is a mistake to think that you are being given something for nothing; you still own exactly the same amount of the company as you did before.
Typically, you may own 100 £11 shares which the company, by a bonus issue, turns into 400 25p shares. It is a book-keeping exercise only. A common reason for a bonus issue is to split up shares that have acquired a high unit price so as to make them more marketable.
A capitalisation issue is similar to a bonus issue, but here you are getting something extra. The company is effectively turning its retained profit into extra shares and distributing them in proportion to the shareholders'existing holdings. Again, you still own the same proportion of the company, and the company has become no more or less profitable. You may find, though, that your dividends increase in total amount as a result.
A rights issue is a combination of an equity issue and bonus issue. The company is selling more shares, but offers them first to existing shareholders in proportion to their holdings. Thus, if you own 500 shares and the company makes a 1 for 4 rights issue, you will be invited to subscribe for another 125 shares. The price you are asked to pay will be less than the current market value.
Clearly if all the shareholders exercise their right to buy, the relative size of their shareholdings will remain unchanged. However, you may not wish to invest money in that company, or you may not be able to afford to do so, so you decline to accept the offer and your shareholding reduces in relative size. However, as the shares have provisionally been allocated to you at less than the market price, the provisional letter of allotment itself is worth something, and you can sell the letter and the rights for a sum slightly less than the difference between the offer price of the shares and their
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