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CMA Intermediate · Corporate Accounting and Auditing · Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares

Zenith Ltd, an unlisted company, wants to offer new equity shares to its existing equity shareholders in proportion to their holdings. Which description correctly identifies this type of issue?

This is a rights issue. New equity shares are offered to existing equity shareholders in proportion to their present holdings, and they pay for them. A bonus issue is made free out of reserves, so it does not match the description.

  1. ARights issue, since existing equity holders are offered shares in proportion to their existing holdingsCorrect
  2. BBonus issue, since shares are offered only to existing holders
  3. CSweat equity issue, since the shares go to insiders
  4. DBuy-back, since the company deals with its own shareholders

Explanation

A rights issue offers new shares to existing equity shareholders in proportion to their holdings, usually for cash. A bonus issue is different because shares are issued free by capitalising reserves, with no cash received. Sweat equity goes to directors or employees, and a buy-back is a purchase of the company's own shares.

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