Bonus issue - Increasing share capital

Question

A company wants to issue 1,000,000,000 bonus shares as fully paid up on a 1:1 basis (one bonus share for one existing share held). The company says it needs to increase the authorised share capital from $500,000,000 comprising 1,000,000,000 shares to $1,000,000,000 comprising 2,000,000,000 shares to faciliate the bonus issue.

Few questions:

1. What does it mean by fully paid up? I assume I will get bonus shares for free, but why did they state "fully paid up"?

2. How can a company just "increase" the authorised share capital from $500 million to $1 billion? Do they need to get $500 million dollars from somewhere to increase the authorised share capital? If so, why not just give the existing shareholders the $500 million, (and do a stock split if desired)?

3. What is the advantage (and disadvantages if any) of increasing the authorised share capital? On wikipedia it states that the difference between a bonus issue and a stock split is that a stock split will split the company's authorized share capital, but the distribution of bonus shares will change/increase the share capital. What is the advantage/disadvantages of either splitting or increasing the share capital?

Answer 1

Fully Paid up Partly Paid up: A company may issue stock to you which is only partly paid up, for example, a company may issue a stock of face value 10 to you and ask you to pay 5 now and other 5 will be adjusted later by some other mechanism. This stock shall be partly paid up. Usually, these stocks are issued in different circumstances, for example as part payment for debentures, preference shares or other capital structuring. On the other hand for a fully paid up share no more money needs to be paid by you or no other adjustments need to be made. So, above, the company is issuing you with stocks for which you will need to pay no further money, they are fully paid for.

Authorized Capital: Authorized capital of a company is the amount of money a company can raise by selling stock (not debt, equity). This number is registered when the company is incorporated, subsequently, this number can be revised upward by applying to the registrar of companies. Now, this means that at max. the company is authorized to raise this much capital and no more. However, a company may raise less than this, which is called Issued Capital. In your case, the company is raising its authorized capital by applying to the registrar of companies, though in this case they are looking at their full authorized capital to be issued capital, it was not necessary to do so.

Increase of Authorized capital: The main benefit is that the company can get more money in form of equity and utilize the same, perhaps, for expansion of business etc., that is the primary benefit.

Bonus Share: Usually, companies keep some surplus as reserve, this money comes out of the profit the company makes and is essentially money of the shareholders. This reserve surplus is maintained for situations, when the money may be required for exigencies. However, this surplus grows over a few years and the company usually the company plans for an expansion of business. However, this money cannot be just taken, as it belongs to the shareholder, so shareholders are issued extra equity in proportion to their current holding and this surplus is capitalized i.e. used as part of the company's equity capital.

Bonus declaration does not add t o the value of the company and the share prices fall in proportion (but not quite) to the bonus.

Answer 2

This is what is called "stock dividend". In essence the company is doing a split, the difference is in financial accounting and shouldn't concern you much as an individual investor. "Fully paid up", in this context, probably means "unconditioned", aka fully vested.

Answer 3

Fully paid up

Shares issued in which no more money is required to be paid to the company by shareholders on the value of the shares. When a company issues shares upon incorporation or through an issuance, either initial or secondary, shareholders are required to pay a set amount for those shares. Once the company has received the full amount from shareholders, the shares become fully paid shares.

authorised share capital

The number of stock units that a publicly traded company can issue as stated in its articles of incorporation, or as agreed upon by shareholder vote. Authorized share capital is often not fully used by management in order to leave room for future issuance of additional stock in case the company needs to raise capital quickly. Another reason to keep shares in the company treasury is to retain a controlling interest in the company.

If so, why not just give the existing shareholders the $500 million, (and do a stock split if desired)?

Stock splits, bonus issues doesn't generate any capital for the firm, which it required.