Type of companies:
- Public Limited Companies
Designated by the letter ‘plc’ and have the right to issue shares & debentures to the public under Companies Act 1985
Companies Act 1985 defines non-distributable profit as:
‘share capital & any capital reserve PLUS excess of accumulated unrealized profits over accumulated losses at the time of intended distribution’
Any reserves not allowed to be distributed under the Act or under companies’ own Memorandum or Article of Association
In public companies, therefore, any net unrealized losses must also be taken into consideration
- Private Limited Companies
Designated by letter ‘ltd’ and they are not allowed to seek share capital by invitations to the public
Companies Act 1985 defines distributable profit as:
‘Accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less accumulated, realized losses so far as not previously written off in a reduction or reorganization of capital’
This, therefore, means that all accumulated net realized profits on the balance sheet date must be considered
Recognized (unrealized) gains / losses are not taken into consideration
Bonus vs Right Issue:
- Bonus Issue
If companies build up reserves over yrs through accumulation of retained profits, share capital may become disproportionate compared to net assets of company
To avoid that, companies may decide to convert these reserves into issued Share Capital by means of ‘Bonus issue’ of shares
Must be authorized by its Article of Association
Bonus should be made fr: Capital Redemption Reserve
Share Premium Account
Other Reserve (retained profit)
There is no cash dividend, i.e. no cash flow
Bonus issue does not bring any new resources unto the company, i.e. no extra cash received
Shareholders are in exactly the same...